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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act
of 1934



|                                            |  |                               
|------------------------------------------- |  | ------------------------------
|For the fiscal year ended December 31, 2003 |  | Commission File Number 1-12875



CORNERSTONE REALTY
INCOME TRUST, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Virginia                                                       |  | 54-1589139                             
|(State or other jurisdiction of incorporation or organization) |  | I.R.S. Employer (Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|306 East Main Street, Richmond, VA       |  | 23219     
|(Address of principal executive offices) |  | (Zip Code)



(804) 643-1761

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:



|                                                    |  |                                          
|--------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                 |  | Name of Each Exchange on Which Registered
|Common Shares, no par value                         |  | New York Stock Exchange                  
|Series A Convertible Preferred Shares, no par value |  | New York Stock Exchange                  



Securities
registered pursuant to Section 12(g) of the Act:



Common
Shares, no par value



Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.  Yes  x  No ̈



Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No ̈



Based on the closing sales price of June 30, 2003, the aggregate market value of the voting common equity held by
non-affiliates of the registrant on such date was $377,023,535.*



On March 1, 2004, there were 55,651,702 shares of the registrants common shares outstanding.



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|* |  | In determining this figure, the company has assumed that all of its officers and directors, and persons known to the company to be beneficial owners of more than 5% of the
companys common shares, are affiliates. Such assumptions should not be deemed conclusive for any other purpose.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE



The portions of the registrants Proxy Statement for its 2004 Annual Meeting of Shareholders referred to in Part III.



TABLE OF CONTENTS



|          |  |                                                                                                |  |           
|--------- |  | ---------------------------------------------------------------------------------------------- |  | ----------
|          |  |                                                                                                |  | PageNumber
|PART I.   |  |                                                                                               
|         
|Item 1.   |  | Business                                                                                       |  | 3         
|         
|Item 2.   |  | Properties                                                                                     |  | 9         
|         
|Item 3.   |  | Legal Proceedings                                                                              |  | 15        
|         
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                            |  | 15        
|         
|PART II.  |  |                                                                                                |  |           
|         
|Item 5.   |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 15        
|         
|Item 6.   |  | Selected Financial Data                                                                        |  | 16        
|         
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 18        
|         
|Item 7A.  |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 30        
|         
|Item 8.   |  | Financial Statements and Supplementary Data                                                    |  | 30        
|         
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 30        
|         
|Item 9A.  |  | Controls and Procedures                                                                        |  | 30        
|         
|PART III. |  |                                                                                                |  |           
|         
|Item 10.  |  | Directors and Executive Officers of the Registrant                                             |  | 31        
|         
|Item 11.  |  | Executive Compensation                                                                         |  | 31        
|         
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 31        
|         
|Item 13.  |  | Certain Relationships and Related Transactions                                                 |  | 31        
|         
|Item 14.  |  | Principal Accountant Fees and Services                                                         |  | 31        
|         
|PART IV.  |  |                                                                                                |  |           
|         
|Item 15.  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 32        



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PART I



Introduction



This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning anticipated improvements in financial operations from completed and planned property renovations. Such statements involve
known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from the results of operations or plans expressed or implied by such forward-looking
statements. Such factors include, among other things, unanticipated adverse business developments affecting the company or the apartment communities, as the case may be, adverse changes in the real estate markets and general and local economies and
business conditions. Although the company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such
statements included in this annual report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation
by the company or any other person that the results or conditions described in such statements or the objectives and plans of the company will be achieved. In addition, the companys continued qualification as a real estate investment trust
involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the companys financial statements and the notes thereto in this regard.



|Item 1. |  | Business
|------- |  | --------



General



Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, referred to below as the company or as we, us or our) is a self-administered real estate
investment trust, or REIT, that is headquartered in Richmond, Virginia, and that owns, acquires, develops and manages apartment communities located in the United States. The company is a Virginia corporation formed in August 1989. Initial
capitalization occurred on August 18, 1992. Operations of rental properties commenced on June 1, 1993. As of December 31, 2003, the company owned 89 apartment communities, which comprised a total of 23,189 apartment homes. The companys
apartment communities are located in Georgia, North Carolina, South Carolina, Texas and Virginia. The companys apartment communities are described in Item 2 of this report, which is hereby incorporated herein by reference.



At December 31, 2003, the company had three divisions (Northern, Southern and
Texas). The Northern division has 20 communities, the Southern division has 40 communities, and the Texas division has 29 communities. As of December 31, 2003, the company had approximately 602 employees, including specialists in acquisition,
management, marketing, leasing, development, accounting and information systems.



Operations Management and Segments



A site
manager is in charge of each of the companys apartment communities. These site managers report to a regional director who in turn reports to a divisional manager. The companys three divisional managers report to the companys
Co-Chief Operating Officers who in turn report to the companys President, whom the company considers to be its Chief Operating Decision Maker (CODM). The CODM separately evaluates each apartment communitys operating results
and budgets on a monthly basis with the respective site manager, regional director and divisional manager. As a result of these meetings, changes in marketing strategy, capital allocation and other operating decisions are made. While each site
manager, regional director and divisional manager is empowered to make day to day decisions, the CODM ultimately determines the allocation of resources for each individual apartment community through the companys budgeting process, which is
developed on an annual basis and updated each month as needed.



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The company believes that each apartment community should be viewed as a separate operating segment and
that the segments have similar economic characteristics, facilities, services and tenants. Furthermore, the company believes that its apartment communities contain similar economic characteristics and achieve similar long-term financial performance.



Product TypeAll of the companys real
estate is apartment communities. Over 97% of the communities are garden style apartments located in suburban settings.



Type of CustomerThe average income of the companys tenants is within 85%-110% of the average income for the standard metropolitan area
in which the community is located.



Lease TermAll
of the companys apartment communities lease to their tenants under comparable lease terms, which range from month-to-month to 12-month leases.



No one apartment community contributes 10% or more of the companys revenues, profits or assets. Accordingly, the company believes aggregation of its
apartment communities into one reporting segment is appropriate.



Objective



The companys objective is to increase distributable
cash flow and common share value by:



| |  |  | increasing rental rates, maintaining high economic occupancy rates, reducing tenant turnover, making value-enhancing and income-producing capital improvements, and controlling
operating costs and capital expenditures at the apartment communities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquiring additional apartment communities at attractive prices that provide the opportunity to improve operating performance through the application of the companys
management, marketing, and renovation programs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Growth
through Management and Leasing Efforts



The company uses
property operating income (rental income less property operating expenses as defined below) as a measure to evaluate each apartment communitys performance, but property operating income should not be deemed to be an alternative to net income,
as determined in accordance with generally accepted accounting principles. In addition, the companys calculation of property operating income may not be comparable to similarly entitled measures reported by other companies. The company
maintains an intense focus on the operations of its apartment communities to generate consistent, sustained growth in property operating income, which it believes is the key to growing cash available for distribution to shareholders and increasing
shareholder value. The company believes that successful implementation of this strategy will allow it to continue to increase its property operating income from its apartment portfolio. Through renovation and enhanced property management of the
apartment communities, the company strives to increase cash flows, thereby adding value to the underlying real estate.



The company seeks to increase property operating income through active property management, which includes attempting to keep rental rates at or above
market levels, maintaining high economic occupancy through tenant retention, creating a property identity, effectively marketing each apartment community, and controlling property operating expenses at the property level. Property operating expenses
include the following expense categories: property and maintenance, taxes and insurance and property management. These categories primarily consist of property taxes and insurance, repairs and maintenance, utilities, payroll costs and advertising
and marketing.



Management believes that tenant retention is
critical to generating property operating income growth. Tenant retention maintains or increases economic occupancy and minimizes the costs associated with preparing apartments for new occupants. The company employs one person at each apartment
community who has a



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primary focus on tenant retention. The tenant retention specialists objective is to make tenants feel at home in the community through personal
attention, which includes organizing social functions and activities as well as responding promptly to any tenant problems that may arise in conjunction with the apartment or community. The companys philosophy is to market its apartment
communities continually to existing tenants in order to achieve a low turnover rate. The companys turnover rate was 71% for 2003 and 2002. The company believes that the turnover rate of its apartment communities is in line with the average
turnover rate for comparable apartment communities.



Purchase
discounts are sought at both the corporate level and locally in those areas where the company has a significant presence. All major contracts for goods and services are re-bid annually to ensure competitive pricing. The company has a preventive
maintenance program and the ability to perform work using in-house personnel, which helps the companys efforts to reduce property operating expenses at the apartment communities. For example, the maintenance manager at each property is
qualified to perform HVAC and plumbing work which otherwise would be contracted outside the company. In addition, the company passes through expenses to tenants by sub-metering of utilities as permitted by local and state regulations.



Growth through Acquisitions, Renovations and Expansion



The company also seeks to generate growth in property operating income
through acquisitions by: (a) acquiring under-performing assets at less than replacement cost; (b) correcting operational problems; (c) making selected renovations; (d) increasing economic occupancy; (e) raising rental rates; (f) implementing cost
controls; and (g) providing enhanced property and centralized management. In markets that it targets for acquisition opportunities, the company attempts to gain a significant local presence in order to achieve operating efficiencies. In analyzing
acquisition opportunities, the company considers acquisitions of property portfolios as well as individual properties.



The company analyzes specific criteria in connection with a proposed acquisition. These criteria include: (a) the market in which a property is located
and whether it has a diversified economy, stable employment base and increasing average household income; (b) the propertys current and projected cash flow and expected ability to increase property operating income; (c) the condition and
design of the property and whether the property can benefit from renovations; (d) historical and projected occupancy rates; (e) the geographic location in light of the companys diversification objectives; and (f) the purchase price of the
property as it relates to the cost of new construction.



If
sufficient tenant demand exists and suitable land is available, the company may construct additional apartment homes on land adjacent to certain apartment communities. The company believes that its successful experience with large-scale property
renovation will also permit strategic and cost-effective property expansion. It is the companys policy either to construct additional apartment homes itself or acquire additional apartment homes on a turn-key basis from a third party
contractor.



Acquisition of Merry Land Properties, Inc.



On May 28, 2003, the company completed the acquisition of
Merry Land Properties, Inc. (Merry Land), which owned nine apartment communities in South Carolina and Georgia containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the
company plans to develop into additional apartment homes, and a third party property management business. The acquisition was structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as
a tax-free reorganization and was accounted for under the purchase method of accounting. The company used various valuation methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of
in-place leases and debt assumed. The purchase price was $159.1 million,which includes the issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger
agreement, each Merry Land shareholder received 1.818 of the companys common shares and 0.220 of the companys Series B convertible preferred shares. A total of 5.0



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million common shares and 0.6 million of the companys Series B convertible preferred shares were issued as a result of the merger. The Series B
convertible preferred shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of Merry Lands debt with a fair value of $110.5 million at the date
of assumption. No goodwill was recorded as a result of this transaction.



Development



The
company has three development projects in progress, two of which were assumed with the Merry Land merger mentioned above. All development projects and related carrying costs are capitalized. The costs of development projects include interest, real
estate taxes, insurance and certain internal development and related overhead costs directly related to the apartment community under development. Interest is capitalized to development projects based upon the weighted average cumulative project
costs for each period multiplied by the companys borrowing costs on its line of credit, expressed as a percentage. The internal development and related overhead costs are capitalized to the development projects based upon the effort
identifiable with such projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as real estate under development. The company ceases the capitalization of
such costs as the apartment homes become substantially complete and available for occupancy.



Disposition of Investments



During the first quarter of 2003, the company closed on the sale of two apartment communities containing a total of 395 apartment homes for a total of $15.9 million and recognized a gain of $1.9 million. As a result of the sales, the
companys financial statements have been prepared with these two apartment communities results of operations and the gain from sale isolated and shown as discontinued operations. All historical statements presented have been
restated to conform to this presentation in accordance with Statement of Financial Accounting Standards No. 144.



Third Party Property Management



In conjunction with the Merry Land merger, the company acquired a third party property management business which included six apartment communities. As of
December 31, 2003, the company managed seven apartment communities with 1,828 apartment homes. For the year ended December 31, 2003, the company recognized $0.3 million in third party property management income.



Operating Partnership



Effective October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company
(collectively, the Limited Partners), and the company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the Limited Partnership). The company has approximately
an 84% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange
for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a portion of the preferred operating partnership units. Upon election, the company, at its option, will
convert the preferred operating partnership units into either common shares of the company on a one-for-one basis or cash in an amount per unit equal to the closing price of a common share of the company on the exercise date (or other specified
price if there is no closing price on that date), subject to anti-dilution adjustments.



During the first quarter of 2003, a total of 887,125 preferred operating partnership units were converted into common shares on a one-to-one basis. During 2003, the remaining 319,715 non-preferred operating
partnership units converted into preferred operating partnership units once certain lease-up and stabilization criteria were met. As of December 31, 2003, there were 1,807,145 preferred operating partnership units eligible for conversion into common
shares on a one-for-one basis or cash, at the companys option.



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Financing Policy



The companys objective is to seek capital as needed at the lowest possible cost. In addition to obtaining capital from future sales of common
shares, the company may obtain capital from lines of credit or other secured or unsecured borrowings.



The following is a summary of the companys financing activities for the year ended December 31, 2003:



| |  |  | Entered into a $50 million secured variable rate financing. The note bears interest at LIBOR plus 125 basis points (2.37% at December 31, 2003). The maturity date is July 9, 2005
with three one-year extension options. The note requires payments of interest only and is secured by five apartment communities. The note is prepayable after one year without penalty.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entered into $38.5 million in secured financing which is represented by four promissory notes. The notes bear interest at the Discount Mortgage Backed Security index plus 82 basis
points (1.94% at December 31, 2003), and the maturity date is August 1, 2008. These notes require payments of interest only and are secured by four apartment communities. The notes are prepayable after one year with 1% penalty.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entered into a $13.3 million financing secured by one apartment community. The note bears interest at the Discount Mortgage Backed Security index plus 82 basis points (1.94% at
December 31, 2003), and the maturity date is September 1, 2008. The note requires payment of interest only. The note is prepayable after one year with 1% penalty.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entered into a $50 million secured credit facility. The secured credit facility is divided into two loans, a $40 million revolving credit facility and a $10 million
swingline credit facility. The secured lines of credit bears interest at LIBOR plus 1.575% and the maturity date is May 30, 2005. The secured lines of credit requires quarterly payments of interest only and is secured by seven apartment
communities. The company is obligated to pay lenders a quarterly commitment fee equal to .25% per annum of the unused portion of the credit facility. At December 31, 2003, the outstanding balance was $12.5 million on the credit facility and $1.1
million was outstanding on the swingline credit facility.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Repaid and terminated the $85 million unsecured line of credit using proceeds from the above financings.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Repaid $23.3 million in variable and fixed rate mortgage notes using proceeds from the above financings.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | In connection with the Merry Land merger, the company assumed nine fixed or variable rate mortgage notes with an aggregate principal amount of $90.6 million. These mortgages were
recorded at a fair value of $110.5 million at the date of assumption. The difference between the fair value and the principal amount is being amortized as an adjustment to interest expense over the term of the respective notes. The mortgage notes
bear a weighted interest rate of 7.4% per annum and an effective weighted average interest rate of 3.2%, including the effect of the fair value adjustment. The fixed rate mortgage notes are payable in monthly installments, including principal and
interest. The variable rate mortgage note requires payments of interest only. Prepayment penalties apply for early retirements on the fixed rate mortgage notes. Scheduled maturities are at various dates through September 2011 and one mortgage note
matures November 2041.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Paid scheduled debt maturities in the amount of $4.2 million.
| | - |  | -------------------------------------------------------------



Tax Matters



The company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code of 1986, as amended (the
Code). Generally, a real estate investment trust that complies with the provisions of the Code and distributes at least 90% of its taxable income to its shareholders does not pay federal income taxes on its distributed income.
Accordingly, no provision has been made for federal income taxes. The company is subject to various state, local, excise and franchise taxes.



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The company created a C-corporation which elected the taxable REIT subsidiary (TRS) status
for financing purposes for one apartment community. The TRS is subject to federal, state and local income taxes. For the year ended December 31, 2003, the impact of this TRSs income taxes and related tax attributes were not material to the
accompanying consolidated financial statements.



Competitive Conditions



In most of our markets, competition for new tenants is
intense, especially due to the low mortgage interest rates which make owning homes more affordable. Some competing apartment communities offer features that our apartment communities do not have. Some competing apartment communities may use
concessions or lower rents to obtain competitive advantages. Also, some competing apartment communities are larger or newer than our apartment communities.



Environmental Matters



In connection with each of its property acquisitions, the company typically obtains a Phase I Environmental Report, and such additional environmental
reports and surveys as are necessitated by such preliminary report. Based on such reports, the company is not aware of any environmental situations requiring remediation at its apartment communities which have not been or are not currently being
remediated as necessary.



Additional Information on Policies With Respect to
Investments and Certain Other Activities



This section
sets forth certain additional information on the general policies of the company with respect to investments and various other activities. In general, the companys board of directors may establish and change investment and other related
policies without any shareholder approval. The provisions of the Internal Revenue Code applicable to real estate investment trusts impose various restrictions on the nature of the investments and activities of the company, and it is the
companys intention at all times fully to comply with these REIT tax requirements.



The company currently intends to invest solely in residential apartment communities and assets related to such communities or otherwise related to the management and operation of such properties. The company is
permitted to invest in other types of real estate, but has no present intention to do so. The companys geographical focus is in the areas described above. The company may elect to acquire properties in other regions if that action is deemed
consistent with the companys business objectives.



The
company seeks to acquire properties with a view to both current income and possible capital appreciation. The company seeks to diversify its investment capital among numerous properties so as to avoid the allocation of any significant percentage of
total investment to any single property or group of related properties.



The company has no specific limit on the amount of secured or unsecured debt it may incur. As indicated, the company will seek capital as needed at the lowest possible cost, but also has a policy of maintaining debt at a prudent level in
relation to total company capitalization and debt service requirements in relation to its income.



As discussed above, the company may directly, or through wholly-owned subsidiaries, own its properties or may, in appropriate cases, acquire additional
interests in joint ventures that own properties. The companys predominant method of financing acquisitions is with cash, which it may obtain through borrowings, sales of its securities, dispositions of other properties, or through other means.
However, in suitable situations, the company may use as consideration for property acquisitions its own securities (such as operating partnership units of entities it forms, or its own common or preferred shares).



The company may invest its cash reserves in various types of short-term
liquid investments, such as money market funds, prime commercial paper, certificates of deposit or U.S. government securities. The company



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expects that this temporary investment of cash reserves will be limited to providing a return on cash held for other company purposes, such as property
acquisitions and renovations, and does not reflect any intention to engage in the business of investing or trading in securities. The company does not currently intend to invest in real estate mortgages.



The company, acting through its board of directors, is authorized to issue
both common shares and preferred shares. In general, both common shares and preferred shares may be issued for such consideration as may be determined by the board of directors without any need for authorization by holders of the common shares. The
preferred shares can be issued in one or more series having varying voting rights, redemption and conversion features, distribution rights, preferences, and such other rights, including rights of approval of specified transactions, as may be
determined by the board of directors.



As discussed above, in
analyzing acquisition opportunities, the company considers acquisitions of property portfolios as well as acquisitions of individual properties. When appropriate, the company will consider the acquisition (by merger, share exchange or similar
transaction) of other companies which own properties that are consistent with the companys investment objectives. As appropriate, the company may also seek to provide additional property management services to properties owned by third parties
and to receive property management fees for those services, subject to the REIT provisions of the Internal Revenue Code.



The company has no present intention of making loans to other persons or underwriting the securities of other companies.



The company has in the past repurchased its common shares in open-market
transactions. The company currently has such a common share repurchase program in place and may, in the future, engage in the repurchase of its shares in open-market or other transactions if the company deems such repurchase prudent and consistent
with the overall operational objectives of the company.



The
company provides additional information on its policies with respect to investments and related activities in both annual and quarterly reports to its security holders, which also include financial statements of the company (and its consolidated
subsidiaries) for the relevant periods.



Internet Website



The address of the companys Internet website is
www.cornerstonereit.com. The company makes available free of charge on or through its Internet website its annual report on Form 10-K, quarterly reports on From 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the company electronically files such material with, or furnishes such material to, the SEC.



|Item 2. |  | Properties
|------- |  | ----------



As of December 31, 2003, the company owned 89 apartment communities, which comprised a total of 23,189 apartment homes. Those apartment communities were
located in Georgia (11 communities), North Carolina (28 communities), South Carolina (9 communities), Texas (29 communities), and Virginia (12 communities).



The following table sets forth specific information regarding the companys apartment communities and their respective apartment homes:





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|                           |  |               |  |               |  |                |  |                   |            |                        |   |                               |  |                         |            |                                            |     |                                       |   |         |  |      
|-------------------------- |  | ------------- |  | ------------- |  | -------------- |  | ----------------- | ---------- | ---------------------- | - | ----------------------------- |  | ----------------------- | ---------- | ------------------------------------------ | --- | ------------------------------------- | - | ------- |  | -----
|Property                   |  | Location      |  | Date ofConst. |  | DateAcquired   |  | Encum-brances(11) |            | InitialAcquisitionCost |   | TotalInvestment at12-31-03(1) |  | Number ofApartmentHomes |            | TotalInvestmentPerApartmentHome at12-31-03 |     | AverageApartmentHome Size(SquareFeet)
|Georgia                    |  |               |  |               |  |                |  |                   |            |                        |   |                               |  |                         |            |                                            |     |                                       |   |         |  |      
|Ashley Run                 |  | Atlanta       |  | 1987          |  | Apr. 30, 1997  |  |                   | (9)        |                        | $ | 18,000,000                    |  | $                       | 22,263,394 |                                            | 348 |                                       | $ | 63,975  |  | 1,150
|Stone Brook                |  | Atlanta       |  | 1986          |  | Oct. 31, 1997  |  |                   | (9)        |                        |   | 7,850,000                     |  |                         | 10,139,267 |                                            | 188 |                                       |   | 53,932  |  | 937  
|Carlyle Club               |  | Atlanta       |  | 1974          |  | Apr. 30, 1997  |  | $                 | 13,700,000 |                        |   | 11,580,000                    |  |                         | 14,921,829 |                                            | 243 |                                       |   | 61,407  |  | 1,089
|Dunwoody Springs           |  | Atlanta       |  | 1981          |  | July 25, 1997  |  |                   | 13,325,000 |                        |   | 15,200,000                    |  |                         | 22,493,488 |                                            | 350 |                                       |   | 64,267  |  | 948  
|Poplar Place               |  | Atlanta       |  | 1989/1995     |  | Sept. 7, 2001  |  |                   | 24,820,504 |                        |   | 34,650,000                    |  |                         | 38,602,702 |                                            | 524 |                                       |   | 73,669  |  | 1,079
|Spring Lake                |  | Atlanta       |  | 1986          |  | Aug. 12, 1998  |  |                   | (9)        |                        |   | 9,000,000                     |  |                         | 10,737,457 |                                            | 188 |                                       |   | 57,114  |  | 1,009
|Greentree                  |  | Savannah      |  | 1984          |  | May 28, 2003   |  |                   | 7,720,604  |                        |   | 10,944,703                    |  |                         | 11,104,646 |                                            | 194 |                                       |   | 57,240  |  | 852  
|Hammocks                   |  | Savannah      |  | 1997          |  | May 28, 2003   |  |                   | 22,813,593 |                        |   | 25,343,106                    |  |                         | 25,468,980 |                                            | 308 |                                       |   | 82,691  |  | 1,051
|Huntington                 |  | Savannah      |  | 1986          |  | May 28, 2003   |  |                   | 5,727,614  |                        |   | 8,275,052                     |  |                         | 8,345,682  |                                            | 147 |                                       |   | 56,773  |  | 813  
|Marsh Cove                 |  | Savannah      |  | 1983          |  | May 28, 2003   |  |                   | 9,376,414  |                        |   | 11,873,833                    |  |                         | 12,233,267 |                                            | 188 |                                       |   | 65,071  |  | 1,053
|Merritt at Whitemarsh      |  | Savannah      |  | 2002          |  | May 28, 2003   |  |                   | 15,000,000 |                        |   | 22,806,319                    |  |                         | 22,868,913 |                                            | 241 |                                       |   | 94,892  |  | 1,017
|                           |  |               |  |               |  |                |  |                   |           
|North Carolina             |  |               |  |               |  |                |  |                   |            |                        |   |                               |  |                         |            |                                            |     |                                       |   |         |  |      
|The Meadows                |  | Asheville     |  | (5)           |  | (5)            |  |                   | 14,885,000 |                        |   | 17,836,000                    |  |                         | 19,786,994 |                                            | 392 |                                       |   | 50,477  |  | 1,033
|Beacon Hill                |  | Charlotte     |  | 1985          |  | May 1, 1996    |  |                   | (10)       |                        |   | 13,579,203                    |  |                         | 16,956,218 |                                            | 349 |                                       |   | 48,586  |  | 734  
|Bridgetown Bay             |  | Charlotte     |  | 1986          |  | April 1, 1996  |  |                   | (10)       |                        |   | 5,025,000                     |  |                         | 6,451,915  |                                            | 120 |                                       |   | 53,766  |  | 867  
|Charleston Place           |  | Charlotte     |  | 1986          |  | May 13, 1997   |  |                   | (9)        |                        |   | 9,475,000                     |  |                         | 11,021,145 |                                            | 214 |                                       |   | 51,501  |  | 806  
|Greystone Crossing         |  | Charlotte     |  | 1998\2000     |  | May 8, 2000    |  |                   | (10)       |                        |   | 26,800,000                    |  |                         | 28,125,243 |                                            | 408 |                                       |   | 68,934  |  | 927  
|Heatherwood                |  | Charlotte     |  | (2)           |  | (2)            |  |                   | 16,250,000 |                        |   | 17,630,457                    |  |                         | 27,569,525 |                                            | 476 |                                       |   | 57,919  |  | 1,186
|Meadow Creek               |  | Charlotte     |  | 1984          |  | May 31, 1996   |  |                   | 9,376,481  |                        |   | 11,100,000                    |  |                         | 13,967,192 |                                            | 250 |                                       |   | 55,869  |  | 860  
|Paces Glen                 |  | Charlotte     |  | 1986          |  | July 19, 1996  |  |                   |           |                        |   | 7,425,000                     |  |                         | 9,136,247  |                                            | 172 |                                       |   | 53,118  |  | 907  
|Legacy Park                |  | Charlotte     |  | 2001          |  | Oct. 1, 2001   |  |                   | 7,250,000  |                        |   | 21,888,522                    |  |                         | 21,979,657 |                                            | 288 |                                       |   | 76,318  |  | 1,004
|Timber Crest               |  | Charlotte     |  | 2000          |  | Oct. 1, 2001   |  |                   | 14,989,944 |                        |   | 19,076,149                    |  |                         | 19,489,838 |                                            | 282 |                                       |   | 69,113  |  | 983  
|Summerwalk                 |  | Charlotte     |  | 1983          |  | May 1, 1996    |  |                   | 6,000,000  |                        |   | 5,660,000                     |  |                         | 8,217,332  |                                            | 160 |                                       |   | 51,358  |  | 963  
|Stone Point                |  | Charlotte     |  | 1986          |  | Jan. 15, 1998  |  |                   | (9)        |                        |   | 9,700,000                     |  |                         | 10,736,845 |                                            | 192 |                                       |   | 55,921  |  | 848  
|The Enclave at South Tryon |  | Charlotte     |  | 2002          |  | Dec. 2, 2002   |  |                   | (10)       |                        |   | 16,100,000                    |  |                         | 16,323,220 |                                            | 216 |                                       |   | 75,570  |  | 1,093
|Deerfield                  |  | Durham        |  | 1985          |  | Nov. 1, 1996   |  |                   | 9,992,454  |                        |   | 10,675,000                    |  |                         | 12,000,561 |                                            | 204 |                                       |   | 58,827  |  | 888  
|The Landing                |  | Durham        |  | 1984          |  | May 1, 1996    |  |                   | 7,442,500  |                        |   | 8,345,000                     |  |                         | 10,825,256 |                                            | 200 |                                       |   | 54,126  |  | 960  
|Parkside at Woodlake       |  | Durham        |  | 1996          |  | Aug. 31, 1996  |  |                   | 9,000,000  |                        |   | 14,663,886                    |  |                         | 16,059,806 |                                            | 266 |                                       |   | 60,375  |  | 865  
|Highland Hills             |  | Carrboro      |  | 1987          |  | Sept. 27, 1996 |  |                   | 14,524,156 |                        |   | 12,100,000                    |  |                         | 15,601,329 |                                            | 264 |                                       |   | 59,096  |  | 1,000
|Clarion Crossing           |  | Raleigh       |  | 1972          |  | Sept. 30, 1997 |  |                   | 11,000,000 |                        |   | 14,225,488                    |  |                         | 15,222,467 |                                            | 260 |                                       |   | 58,548  |  | 803  
|Remington Place            |  | Raleigh       |  | 1985          |  | Oct. 31, 1997  |  |                   | (9)        |                        |   | 7,900,000                     |  |                         | 9,217,273  |                                            | 136 |                                       |   | 67,774  |  | 1,098
|St. Regis                  |  | Raleigh       |  | 1986          |  | Oct. 31, 1997  |  |                   | (9)        |                        |   | 9,800,000                     |  |                         | 11,341,523 |                                            | 180 |                                       |   | 63,008  |  | 840  
|The Trestles               |  | Raleigh       |  | 1987          |  | Dec. 30, 1994  |  |                   |           |                        |   | 10,350,000                    |  |                         | 12,289,223 |                                            | 280 |                                       |   | 43,890  |  | 776  
|The Timbers                |  | Raleigh       |  | 1983          |  | June 4, 1998   |  |                   |           |                        |   | 8,100,000                     |  |                         | 9,342,911  |                                            | 176 |                                       |   | 53,085  |  | 745  
|Trinity Commons            |  | Raleigh       |  | (8)           |  | (8)            |  |                   | 27,868,055 |                        |   | 37,805,886                    |  |                         | 38,484,050 |                                            | 462 |                                       |   | 83,299  |  | 953  
|Glen Eagles                |  | Winston-Salem |  | (6)           |  | (6)            |  |                   | 10,010,000 |                        |   | 16,887,653                    |  |                         | 18,757,608 |                                            | 310 |                                       |   | 60,508  |  | 978  
|Mill Creek                 |  | Winston-Salem |  | 1984          |  | Sept. 1, 1995  |  |                   | 6,207,500  |                        |   | 8,550,000                     |  |                         | 10,324,246 |                                            | 220 |                                       |   | 46,928  |  | 897  
|Pinnacle Ridge             |  | Asheville     |  | 1951          |  | April 1, 1998  |  |                   | 4,893,565  |                        |   | 5,731,150                     |  |                         | 7,418,461  |                                            | 168 |                                       |   | 44,158  |  | 885  
|Autumn Park                |  | Greensboro    |  | 2001          |  | Oct. 1, 2001   |  |                   | 14,752,857 |                        |   | 20,074,327                    |  |                         | 20,149,588 |                                            | 264 |                                       |   | 76,324  |  | 983  
|St. Andrews                |  | Wilmington    |  | (7)           |  | (7)            |  |                   | 18,253,060 |                        |   | 27,369,289                    |  |                         | 28,027,966 |                                            | 390 |                                       |   | 71,867  |  | 903  
|                           |  |               |  |               |  |                |  |                   |           
|South Carolina             |  |               |  |               |  |                |  |                   |            |                        |   |                               |  |                         |            |                                            |     |                                       |   |         |  |      
|Westchase                  |  | Charleston    |  | 1985          |  | Jan. 15, 1997  |  |                   | (9)        |                        |   | 11,000,000                    |  |                         | 14,418,536 |                                            | 352 |                                       |   | 40,962  |  | 706  
|Hampton Pointe             |  | Charleston    |  | 1986          |  | Mar 31, 1998   |  |                   | (9)        |                        |   | 12,225,000                    |  |                         | 16,861,267 |                                            | 304 |                                       |   | 55,465  |  | 1,035
|Merritt at James Island    |  | Charleston    |  | 2002          |  | May 28, 2003   |  |                   | 18,575,651 |                        |   | 24,609,146                    |  |                         | 24,668,271 |                                            | 230 |                                       |   | 107,253 |  | 1,026
|Quarterdeck                |  | Charleston    |  | 1987          |  | May 28, 2003   |  |                   | 11,449,336 |                        |   | 15,793,851                    |  |                         | 15,888,203 |                                            | 230 |                                       |   | 69,079  |  | 813  
|Waters Edge                |  | Charleston    |  | 1985          |  | May 28, 2003   |  |                   | 8,271,007  |                        |   | 10,340,401                    |  |                         | 10,434,566 |                                            | 204 |                                       |   | 51,150  |  | 918  
|Windsor Place              |  | Charleston    |  | 1985          |  | May 28, 2003   |  |                   | 10,491,799 |                        |   | 14,017,697                    |  |                         | 14,089,801 |                                            | 224 |                                       |   | 62,901  |  | 953  
|The Arbors at Windsor Lake |  | Columbia      |  | 1991          |  | Jan. 1, 1997   |  |                   | (9)        |                        |   | 10,875,000                    |  |                         | 12,327,274 |                                            | 228 |                                       |   | 54,067  |  | 966  
|Stone Ridge                |  | Columbia      |  | 1975          |  | Dec. 8, 1993   |  |                   |           |                        |   | 3,325,000                     |  |                         | 6,688,548  |                                            | 191 |                                       |   | 35,019  |  | 1,047
|Cape Landing               |  | Myrtle Beach  |  | 1997/1998     |  | Oct. 16, 1998  |  |                   | 9,050,000  |                        |   | 17,100,000                    |  |                         | 19,828,429 |                                            | 288 |                                       |   | 68,849  |  | 933  



10



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##### Table of Contents

|                              |  |                 |  |               |  |                |  |                   |             |                        |   |                               |  |                         |               |                                            |        |                                       |   |        |  |      
|----------------------------- |  | --------------- |  | ------------- |  | -------------- |  | ----------------- | ----------- | ---------------------- | - | ----------------------------- |  | ----------------------- | ------------- | ------------------------------------------ | ------ | ------------------------------------- | - | ------ |  | -----
|Property                      |  | Location        |  | Date ofConst. |  | DateAcquired   |  | Encum-brances(11) |             | InitialAcquisitionCost |   | TotalInvestment at12-31-03(1) |  | Number ofApartmentHomes |               | TotalInvestmentPerApartmentHome at12-31-03 |        | AverageApartmentHome Size(SquareFeet)
|Virginia                      |  |                 |  |               |  |                |  |                   |             |                        |   |                               |  |                         |               |                                            |        |                                       |   |        |  |      
|Trophy Chase                  |  | Charlottesville |  | (4)           |  | (4)            |  |                   | 15,000,000  |                        |   | 12,628,991                    |  |                         | 19,326,573    |                                            | 425    |                                       |   | 45,474 |  | 803  
|Greenbrier                    |  | Fredericksburg  |  | 1980          |  | Oct. 1, 1996   |  |                   | 12,533,536  |                        |   | 11,099,525                    |  |                         | 12,899,294    |                                            | 258    |                                       |   | 49,997 |  | 851  
|Tradewinds                    |  | Hampton         |  | 1988          |  | Nov. 1, 1995   |  |                   | 10,852,861  |                        |   | 10,200,000                    |  |                         | 12,598,306    |                                            | 284    |                                       |   | 44,360 |  | 930  
|Ashley Park                   |  | Richmond        |  | 1988          |  | March 1, 1996  |  |                   | 9,500,000   |                        |   | 12,205,000                    |  |                         | 13,955,955    |                                            | 272    |                                       |   | 51,309 |  | 765  
|Hampton Glen                  |  | Richmond        |  | 1986          |  | August 1, 1996 |  |                   | 12,389,822  |                        |   | 11,599,931                    |  |                         | 14,045,406    |                                            | 232    |                                       |   | 60,541 |  | 788  
|Trolley Square                |  | Richmond        |  | (3)           |  | (3)            |  |                   | 9,500,000   |                        |   | 10,242,575                    |  |                         | 14,563,290    |                                            | 325    |                                       |   | 44,810 |  | 589  
|The Gables                    |  | Richmond        |  | 1987          |  | July 2, 1998   |  |                   | 8,000,000   |                        |   | 11,500,000                    |  |                         | 13,513,942    |                                            | 224    |                                       |   | 60,330 |  | 700  
|Chase Gayton                  |  | Richmond        |  | 1984          |  | June 21, 2001  |  |                   | 15,557,197  |                        |   | 21,175,000                    |  |                         | 22,463,857    |                                            | 328    |                                       |   | 68,487 |  | 949  
|Waterford                     |  | Richmond        |  | 1989          |  | Dec. 10, 2001  |  |                   | 16,565,166  |                        |   | 22,500,000                    |  |                         | 23,840,663    |                                            | 312    |                                       |   | 76,412 |  | 995  
|Arbor Trace                   |  | VirginiaBeach   |  | 1985          |  | March 1, 1996  |  |                   | 5,000,000   |                        |   | 5,000,000                     |  |                         | 6,428,903     |                                            | 148    |                                       |   | 43,439 |  | 850  
|Harbour Club                  |  | VirginiaBeach   |  | 1988          |  | May 1, 1994    |  |                   | 8,331,115   |                        |   | 5,250,000                     |  |                         | 7,575,158     |                                            | 214    |                                       |   | 35,398 |  | 813  
|Mayflower Seaside             |  | VirginiaBeach   |  | 1950          |  | Oct. 26, 1993  |  |                   | 10,500,000  |                        |   | 7,634,144                     |  |                         | 13,187,271    |                                            | 263    |                                       |   | 50,142 |  | 698  
|                              |  |                 |  |               |  |                |  |                   |            
|Texas                         |  |                 |  |               |  |                |  |                   |             |                        |   |                               |  |                         |               |                                            |        |                                       |   |        |  |      
|Brookfield                    |  | Dallas          |  | 1984          |  | July 23, 1999  |  |                   | (10)        |                        |   | 8,014,533                     |  |                         | 8,133,390     |                                            | 232    |                                       |   | 35,058 |  | 714  
|Toscana                       |  | Dallas          |  | 1986          |  | July 23, 1999  |  |                   | 5,250,000   |                        |   | 7,334,023                     |  |                         | 7,632,389     |                                            | 192    |                                       |   | 39,752 |  | 601  
|Paces Cove                    |  | Dallas          |  | 1982          |  | July 23, 1999  |  |                   | 10,916,414  |                        |   | 11,712,879                    |  |                         | 12,716,745    |                                            | 328    |                                       |   | 38,771 |  | 670  
|Timberglen                    |  | Dallas          |  | 1984          |  | July 23, 1999  |  |                   | 9,500,000   |                        |   | 13,220,605                    |  |                         | 14,355,900    |                                            | 304    |                                       |   | 47,223 |  | 728  
|Summer Tree                   |  | Dallas          |  | 1980          |  | July 23, 1999  |  |                   | 7,618,424   |                        |   | 7,724,156                     |  |                         | 8,838,434     |                                            | 232    |                                       |   | 38,097 |  | 575  
|Devonshire                    |  | Dallas          |  | 1978          |  | July 23, 1999  |  |                   | 3,571,283   |                        |   | 7,564,892                     |  |                         | 8,415,575     |                                            | 144    |                                       |   | 58,441 |  | 876  
|The Courts on Pear Ridge      |  | Dallas          |  | 1988          |  | July 23, 1999  |  |                   | 10,395,462  |                        |   | 11,843,691                    |  |                         | 12,427,823    |                                            | 242    |                                       |   | 51,355 |  | 774  
|Eagle Crest                   |  | Dallas          |  | 1983          |  | July 23, 1999  |  |                   | 15,000,000  |                        |   | 21,566,317                    |  |                         | 22,911,378    |                                            | 484    |                                       |   | 47,338 |  | 887  
|Remington Hills               |  | Dallas          |  | 1984          |  | July 23, 1999  |  |                   | 14,250,000  |                        |   | 20,921,219                    |  |                         | 26,504,248    |                                            | 362    |                                       |   | 73,216 |  | 957  
|Estrada Oaks                  |  | Dallas          |  | 1983          |  | July 23, 1999  |  |                   | 9,226,247   |                        |   | 10,786,882                    |  |                         | 11,608,023    |                                            | 248    |                                       |   | 46,807 |  | 771  
|Aspen Hills                   |  | Dallas          |  | 1979          |  | July 23, 1999  |  |                   | (10)        |                        |   | 7,223,722                     |  |                         | 8,053,921     |                                            | 240    |                                       |   | 33,558 |  | 671  
|Mill Crossing                 |  | Dallas          |  | 1979          |  | July 23, 1999  |  |                   |            |                        |   | 5,269,792                     |  |                         | 5,811,192     |                                            | 184    |                                       |   | 31,583 |  | 691  
|Cottonwood                    |  | Dallas          |  | 1985          |  | July 23, 1999  |  |                   | 5,920,187   |                        |   | 6,271,756                     |  |                         | 7,617,101     |                                            | 200    |                                       |   | 38,086 |  | 751  
|Burney Oaks                   |  | Dallas          |  | 1985          |  | July 23, 1999  |  |                   | 8,332,528   |                        |   | 9,965,236                     |  |                         | 11,055,871    |                                            | 240    |                                       |   | 46,066 |  | 794  
|Copper Crossing               |  | Dallas          |  | 1980/1981     |  | July 23, 1999  |  |                   | (10)        |                        |   | 11,776,983                    |  |                         | 13,179,781    |                                            | 400    |                                       |   | 32,949 |  | 739  
|The Arbors on Forest Ridge    |  | Dallas          |  | 1986          |  | July 23, 1999  |  |                   | 6,250,000   |                        |   | 9,573,954                     |  |                         | 10,236,560    |                                            | 210    |                                       |   | 48,746 |  | 804  
|Park Village                  |  | Dallas          |  | 1983          |  | July 23, 1999  |  |                   | 8,355,690   |                        |   | 8,224,541                     |  |                         | 9,069,012     |                                            | 238    |                                       |   | 38,105 |  | 647  
|Wildwood                      |  | Dallas          |  | 1984          |  | July 23, 1999  |  |                   | 3,324,300   |                        |   | 4,471,294                     |  |                         | 4,963,458     |                                            | 120    |                                       |   | 41,362 |  | 755  
|Main Park                     |  | Dallas          |  | 1984          |  | July 23, 1999  |  |                   | 8,276,528   |                        |   | 9,082,967                     |  |                         | 9,701,322     |                                            | 192    |                                       |   | 50,528 |  | 939  
|Paces Point                   |  | Dallas          |  | 1985          |  | July 23, 1999  |  |                   |            |                        |   | 12,980,245                    |  |                         | 13,995,012    |                                            | 300    |                                       |   | 46,650 |  | 762  
|Silverbrook I                 |  | Dallas          |  | 1982          |  | July 23, 1999  |  |                   | 15,275,910  |                        |   | 15,709,893                    |  |                         | 18,162,105    |                                            | 472    |                                       |   | 38,479 |  | 842  
|Silverbrook II                |  | Dallas          |  | 1984          |  | July 23, 1999  |  |                   | 2,760,953   |                        |   | 5,808,250                     |  |                         | 6,513,047     |                                            | 170    |                                       |   | 38,312 |  | 741  
|Grayson II                    |  | Dallas          |  | 1986          |  | July 23, 1999  |  |                   | 6,075,077   |                        |   | 12,210,121                    |  |                         | 13,000,934    |                                            | 250    |                                       |   | 52,004 |  | 850  
|Grayson I                     |  | Dallas          |  | 1985          |  | July 23, 1999  |  |                   | 6,387,825   |                        |   | 9,948,959                     |  |                         | 12,186,075    |                                            | 200    |                                       |   | 60,930 |  | 840  
|Cutters Point                |  | Dallas          |  | 1978          |  | July 23, 1999  |  |                   | 6,250,000   |                        |   | 9,859,840                     |  |                         | 11,405,228    |                                            | 196    |                                       |   | 58,190 |  | 1,010
|Windsor Heights               |  | Dallas          |  | 1997          |  | Dec. 23, 2002  |  |                   | 25,000,000  |                        |   | 29,000,000                    |  |                         | 29,579,865    |                                            | 396    |                                       |   | 74,697 |  | 1,167
|The Meridian                  |  | Austin          |  | 1988          |  | July 23, 1999  |  |                   | 2,756,297   |                        |   | 7,539,224                     |  |                         | 8,684,771     |                                            | 200    |                                       |   | 43,424 |  | 741  
|Canyon Hills                  |  | Austin          |  | 1996          |  | July 23, 1999  |  |                   | 12,459,809  |                        |   | 12,512,502                    |  |                         | 12,980,739    |                                            | 229    |                                       |   | 56,684 |  | 799  
|Sierra Ridge                  |  | San Antonio     |  | 1981          |  | July 23, 1999  |  |                   | 4,750,000   |                        |   | 6,624,666                     |  |                         | 8,624,024     |                                            | 230    |                                       |   | 37,496 |  | 751  
|Real estate under development |  |                 |  |               |  |                |  |                   |             |                        |   | 5,449,674                     |  |                         | 5,449,674     |                                            |        |                                       |   |        |  |      
|                              |  |                 |  |               |  |                |  |                   |             |                        |   |                               |  |                         |               |                                            |        |                                       |   |        |  |      
|                              |  |                 |  |               |  |                |  | $                 | 801,753,725 |                        | $ | 1,149,910,100                 |  | $                       | 1,307,420,374 |                                            | 23,189 |                                       | $ | 56,381 |  |      
|                              |  |                 |  |               |  |                |  |                   |             |                        |   |                               |  |                         |               |                                            |        |                                       |   |        |  |      



11



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##### Table of Contents

Notes to table of apartment communities:



|(1) |  | Total Investment includes the purchase price of the apartment community plus real estate commissions, closing costs and improvements capitalized since the
communitys date of acquisition.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Heatherwood Apartments is comprised of Heatherwood (completed in 1980) and Italian Village and Villa Marina Apartments (completed in 1980), acquired in September 1996 and August
1997, respectively, at a cost of $10.2 million and $7.4 million. They are adjoining properties and are operated as one apartment community.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Trolley Square Apartments is comprised of Trolley Square East Apartments (completed in 1965) and Trolley Square West Apartments (completed in 1964) acquired in June 1996 and
December 1996, respectively, at a cost of $6.0 million and $4.2 million. They are adjacent properties and are operated as one apartment community.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Trophy Chase is comprised of Trophy Chase (completed in 1970) and Hunters Creek (completed in 1970) acquired in April 1996 and July 1999, respectively, at a cost of $3.7
million and $8.9 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | The Meadows is comprised of The Meadows (completed in 1974), the Enclave (completed in 2000) and Phase II Enclave (completed in 2001) acquired in January 1996, March 2000 and May
2001, respectively, at a cost of $6.2 million, $8.8 million and $2.9 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Glen Eagles is comprised of Glen Eagles (completed in 1990) and Prestwick (completed in 2000) acquired in October 1995 and September 2000, respectively, at a cost of $7.3 million
and $9.6 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | St. Andrews is comprised of St. Andrews (completed in 1998) and St. Andrews II (completed in 2002) acquired in October 2001 and March 2002, respectively, at a cost of $17.1 million
and $10.3 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Trinity Commons is comprised of Trinity Commons (completed in 2000) and Trinity Commons II (completed in 2002) acquired in October 2001 and July 2002, respectively, at a cost of
$22.1 million and $15.7 million.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | $73.5 million of secured debt secured by 10 properties which are individually noted.
|--- |  | ------------------------------------------------------------------------------------

|(10) |  | $13.6 million of secured debt secured by 7 properties which are individually noted.
|---- |  | -----------------------------------------------------------------------------------

|(11) |  | Includes fair value adjustments of $18.4 million.
|---- |  | -------------------------------------------------



12



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##### Table of Contents

The following table sets forth occupancy rates and average rental rates for the companys apartment
communities:



|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|-------------------------- |  | ------------------- | - |  | --------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | --- |  | - | ---
|                           |  | Occupancy Rates (2) |   |  | December Average Rental Rates (3)
|Property                   |  | 2003                |   |  | 2002                              |   |  | 2001 |   |  | 2000 |   |  | 1999 |   |  | 2003 |       | 2002 |   | 2001 |  | 2000 |     | 1999
|Georgia                    |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|Ashley Run                 |  | 79                  | % |  | 82                                | % |  | 88   | % |  | 92   | % |  | 91   | % |  | $    | 713   |      | $ | 757  |  | $    | 817 |      | $ | 822 |  | $ | 781
|Stone Brook                |  | 77                  | % |  | 85                                | % |  | 88   | % |  | 91   | % |  | 92   | % |  |      | 652   |      |   | 680  |  |      | 741 |      |   | 733 |  |   | 703
|Carlyle Club               |  | 78                  | % |  | 86                                | % |  | 88   | % |  | 92   | % |  | 93   | % |  |      | 703   |      |   | 763  |  |      | 783 |      |   | 802 |  |   | 768
|Dunwoody Springs           |  | 88                  | % |  | 91                                | % |  | 93   | % |  | 93   | % |  | 94   | % |  |      | 671   |      |   | 709  |  |      | 763 |      |   | 760 |  |   | 725
|Poplar Place               |  | 87                  | % |  | 86                                | % |  | 89   | % |  |     |   |  |     |   |  |      | 690   |      |   | 709  |  |      | 776 |      |   |    |  |   |   
|Spring Lake                |  | 84                  | % |  | 88                                | % |  | 90   | % |  | 91   | % |  | 91   | % |  |      | 657   |      |   | 705  |  |      | 745 |      |   | 728 |  |   | 693
|Greentree                  |  | 92                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 675   |      |   |     |  |      |    |      |   |    |  |   |   
|Hammocks                   |  | 93                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 852   |      |   |     |  |      |    |      |   |    |  |   |   
|Huntington                 |  | 95                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 706   |      |   |     |  |      |    |      |   |    |  |   |   
|Marsh Cove                 |  | 93                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 768   |      |   |     |  |      |    |      |   |    |  |   |   
|Merritt at Whitemarsh      |  | 84                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 939   |      |   |     |  |      |    |      |   |    |  |   |   
|                           |  |                     |   |  |                                   |   |  |      |   | 
|North Carolina             |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|The Meadows                |  | 92                  | % |  | 93                                | % |  | 93   | % |  | 94   | % |  | 95   | % |  |      | 663   |      |   | 679  |  |      | 688 |      |   | 673 |  |   | 649
|Beacon Hill                |  | 85                  | % |  | 87                                | % |  | 90   | % |  | 91   | % |  | 91   | % |  |      | 572   |      |   | 567  |  |      | 623 |      |   | 632 |  |   | 619
|Bridgetown Bay             |  | 79                  | % |  | 91                                | % |  | 87   | % |  | 90   | % |  | 94   | % |  |      | 563   |      |   | 605  |  |      | 617 |      |   | 668 |  |   | 677
|Charleston Place           |  | 85                  | % |  | 88                                | % |  | 89   | % |  | 91   | % |  | 91   | % |  |      | 547   |      |   | 575  |  |      | 621 |      |   | 638 |  |   | 634
|Greystone Crossing         |  | 79                  | % |  | 81                                | % |  | 91   | % |  | 86   | % |  |     |   |  |      | 624   |      |   | 662  |  |      | 660 |      |   | 695 |  |   |   
|Heatherwood                |  | 81                  | % |  | 85                                | % |  | 91   | % |  | 92   | % |  | 92   | % |  |      | 619   |      |   | 635  |  |      | 658 |      |   | 657 |  |   | 649
|Meadow Creek               |  | 82                  | % |  | 79                                | % |  | 89   | % |  | 88   | % |  | 89   | % |  |      | 552   |      |   | 591  |  |      | 620 |      |   | 652 |  |   | 636
|Paces Glen                 |  | 79                  | % |  | 90                                | % |  | 89   | % |  | 88   | % |  | 92   | % |  |      | 557   |      |   | 607  |  |      | 643 |      |   | 677 |  |   | 658
|Legacy Park                |  | 89                  | % |  | 88                                | % |  | 78   | % |  |     |   |  |     |   |  |      | 735   |      |   | 761  |  |      | 834 |      |   |    |  |   |   
|Timber Crest               |  | 89                  | % |  | 85                                | % |  | 85   | % |  |     |   |  |     |   |  |      | 685   |      |   | 673  |  |      | 763 |      |   |    |  |   |   
|Summerwalk                 |  | 86                  | % |  | 89                                | % |  | 89   | % |  | 94   | % |  | 95   | % |  |      | 600   |      |   | 615  |  |      | 646 |      |   | 668 |  |   | 656
|Stone Point                |  | 88                  | % |  | 83                                | % |  | 90   | % |  | 93   | % |  | 93   | % |  |      | 603   |      |   | 628  |  |      | 672 |      |   | 687 |  |   | 666
|The Enclave at South Tryon |  | 74                  | % |  | 84                                | % |  |     |   |  |     |   |  |     |   |  |      | 711   |      |   | 830  |  |      |    |      |   |    |  |   |   
|Deerfield                  |  | 94                  | % |  | 93                                | % |  | 95   | % |  | 94   | % |  | 94   | % |  |      | 725   |      |   | 787  |  |      | 812 |      |   | 793 |  |   | 757
|The Landing                |  | 88                  | % |  | 88                                | % |  | 96   | % |  | 94   | % |  | 94   | % |  |      | 645   |      |   | 649  |  |      | 714 |      |   | 697 |  |   | 669
|Parkside at Woodlake       |  | 86                  | % |  | 87                                | % |  | 91   | % |  | 93   | % |  | 90   | % |  |      | 667   |      |   | 697  |  |      | 732 |      |   | 732 |  |   | 713
|Highland Hills             |  | 88                  | % |  | 92                                | % |  | 96   | % |  | 95   | % |  | 91   | % |  |      | 809   |      |   | 837  |  |      | 869 |      |   | 842 |  |   | 816
|Clarion Crossing           |  | 84                  | % |  | 86                                | % |  | 92   | % |  | 92   | % |  | 90   | % |  |      | 617   |      |   | 652  |  |      | 591 |      |   | 592 |  |   | 579
|Remington Place            |  | 90                  | % |  | 88                                | % |  | 91   | % |  | 92   | % |  | 92   | % |  |      | 710   |      |   | 717  |  |      | 802 |      |   | 795 |  |   | 782
|St. Regis                  |  | 86                  | % |  | 86                                | % |  | 89   | % |  | 95   | % |  | 92   | % |  |      | 630   |      |   | 654  |  |      | 716 |      |   | 733 |  |   | 700
|The Trestles               |  | 87                  | % |  | 89                                | % |  | 86   | % |  | 90   | % |  | 93   | % |  |      | 560   |      |   | 595  |  |      | 620 |      |   | 621 |  |   | 607
|The Timbers                |  | 87                  | % |  | 88                                | % |  | 90   | % |  | 89   | % |  | 93   | % |  |      | 581   |      |   | 590  |  |      | 655 |      |   | 651 |  |   | 638
|Trinity Commons            |  | 86                  | % |  | 74                                | % |  | 90   | % |  |     |   |  |     |   |  |      | 727   |      |   | 778  |  |      | 822 |      |   |    |  |   |   
|Glen Eagles                |  | 87                  | % |  | 86                                | % |  | 87   | % |  | 87   | % |  | 87   | % |  |      | 656   |      |   | 647  |  |      | 671 |      |   | 701 |  |   | 670
|Mill Creek                 |  | 88                  | % |  | 89                                | % |  | 89   | % |  | 87   | % |  | 89   | % |  |      | 570   |      |   | 576  |  |      | 590 |      |   | 597 |  |   | 585
|Pinnacle Ridge             |  | 94                  | % |  | 96                                | % |  | 96   | % |  | 94   | % |  | 95   | % |  |      | 611   |      |   | 619  |  |      | 607 |      |   | 588 |  |   | 563
|Autumn Park                |  | 86                  | % |  | 90                                | % |  | 93   | % |  |     |   |  |     |   |  |      | 846   |      |   | 771  |  |      | 804 |      |   |    |  |   |   
|St. Andrews                |  | 86                  | % |  | 81                                | % |  | 94   | % |  |     |   |  |     |   |  |      | 668   |      |   | 690  |  |      | 685 |      |   |    |  |   |   
|                           |  |                     |   |  |                                   |   |  |      |   | 
|South Carolina             |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|Westchase                  |  | 92                  | % |  | 91                                | % |  | 93   | % |  | 91   | % |  | 96   | % |  |      | 608   |      |   | 591  |  |      | 599 |      |   | 594 |  |   | 589
|Hampton Pointe             |  | 92                  | % |  | 89                                | % |  | 86   | % |  | 92   | % |  | 97   | % |  |      | 699   |      |   | 678  |  |      | 699 |      |   | 701 |  |   | 681
|Merritt at James Island    |  | 96                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 1,037 |      |   |     |  |      |    |      |   |    |  |   |   
|Quarterdeck                |  | 97                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 763   |      |   |     |  |      |    |      |   |    |  |   |   
|Waters Edge                |  | 98                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 651   |      |   |     |  |      |    |      |   |    |  |   |   
|Windsor Place              |  | 93                  | % |  |                                  |   |  |     |   |  |     |   |  |     |   |  |      | 646   |      |   |     |  |      |    |      |   |    |  |   |   
|The Arbors at Windsor Lake |  | 95                  | % |  | 93                                | % |  | 90   | % |  | 94   | % |  | 90   | % |  |      | 679   |      |   | 676  |  |      | 675 |      |   | 653 |  |   | 661
|Stone Ridge                |  | 88                  | % |  | 83                                | % |  | 83   | % |  | 90   | % |  | 91   | % |  |      | 561   |      |   | 567  |  |      | 584 |      |   | 581 |  |   | 578
|Cape Landing               |  | 92                  | % |  | 89                                | % |  | 90   | % |  | 92   | % |  | 93   | % |  |      | 634   |      |   | 638  |  |      | 658 |      |   | 658 |  |   | 662
|                           |  |                     |   |  |                                   |   |  |      |   | 
|Virginia                   |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|Trophy Chase               |  | 90                  | % |  | 92                                | % |  | 93   | % |  | 92   | % |  | 91   | % |  |      | 707   |      |   | 712  |  |      | 707 |      |   | 673 |  |   | 625
|Greenbrier                 |  | 96                  | % |  | 95                                | % |  | 98   | % |  | 97   | % |  | 95   | % |  |      | 838   |      |   | 821  |  |      | 771 |      |   | 719 |  |   | 681
|Tradewinds                 |  | 94                  | % |  | 97                                | % |  | 91   | % |  | 93   | % |  | 94   | % |  |      | 770   |      |   | 747  |  |      | 717 |      |   | 687 |  |   | 655



13



---

##### Table of Contents

|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|-------------------------- |  | ------------------- | - |  | --------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | --- |  | - | ---
|                           |  | Occupancy Rates (2) |   |  | December Average Rental Rates (3)
|Property                   |  | 2003                |   |  | 2002                              |   |  | 2001 |   |  | 2000 |   |  | 1999 |   |  | 2003 |       | 2002 |   | 2001 |  | 2000 |     | 1999
|Ashley Park                |  | 91                  | % |  | 94                                | % |  | 93   | % |  | 94   | % |  | 94   | % |  |      | 677   |      |   | 680  |  |      | 679 |      |   | 657 |  |   | 629
|Hampton Glen               |  | 91                  | % |  | 92                                | % |  | 93   | % |  | 93   | % |  | 93   | % |  |      | 752   |      |   | 768  |  |      | 767 |      |   | 751 |  |   | 716
|Trolley Square             |  | 93                  | % |  | 94                                | % |  | 96   | % |  | 97   | % |  | 91   | % |  |      | 695   |      |   | 663  |  |      | 678 |      |   | 650 |  |   | 612
|The Gables                 |  | 93                  | % |  | 91                                | % |  | 88   | % |  | 92   | % |  | 92   | % |  |      | 723   |      |   | 719  |  |      | 716 |      |   | 702 |  |   | 654
|Chase Gayton               |  | 92                  | % |  | 91                                | % |  | 93   | % |  |     |   |  |     |   |  |      | 766   |      |   | 769  |  |      | 759 |      |   |    |  |   |   
|Waterford                  |  | 92                  | % |  | 89                                | % |  | 96   | % |  |     |   |  |     |   |  |      | 786   |      |   | 768  |  |      | 603 |      |   |    |  |   |   
|Arbor Trace                |  | 98                  | % |  | 95                                | % |  | 90   | % |  | 90   | % |  | 93   | % |  |      | 773   |      |   | 729  |  |      | 679 |      |   | 686 |  |   | 652
|Harbour Club               |  | 98                  | % |  | 97                                | % |  | 90   | % |  | 92   | % |  | 92   | % |  |      | 773   |      |   | 724  |  |      | 702 |      |   | 686 |  |   | 654
|Mayflower Seaside          |  | 94                  | % |  | 97                                | % |  | 97   | % |  | 95   | % |  | 92   | % |  |      | 894   |      |   | 849  |  |      | 787 |      |   | 758 |  |   | 761
|                           |  |                     |   |  |                                   |   |  |      |   | 
|Texas                      |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|Brookfield                 |  | 81                  | % |  | 92                                | % |  | 96   | % |  | 94   | % |  | 93   | % |  |      | 567   |      |   | 607  |  |      | 609 |      |   | 581 |  |   | 552
|Toscana                    |  | 76                  | % |  | 88                                | % |  | 91   | % |  | 94   | % |  | 97   | % |  |      | 523   |      |   | 560  |  |      | 578 |      |   | 571 |  |   | 546
|Paces Cove                 |  | 78                  | % |  | 84                                | % |  | 88   | % |  | 91   | % |  | 91   | % |  |      | 543   |      |   | 600  |  |      | 625 |      |   | 595 |  |   | 570
|Timberglen                 |  | 82                  | % |  | 83                                | % |  | 88   | % |  | 91   | % |  | 92   | % |  |      | 585   |      |   | 626  |  |      | 652 |      |   | 639 |  |   | 611
|Summer Tree                |  | 86                  | % |  | 90                                | % |  | 92   | % |  | 96   | % |  | 90   | % |  |      | 506   |      |   | 529  |  |      | 564 |      |   | 552 |  |   | 524
|Devonshire                 |  | 85                  | % |  | 85                                | % |  | 90   | % |  | 90   | % |  | 95   | % |  |      | 700   |      |   | 744  |  |      | 746 |      |   | 727 |  |   | 670
|The Courts on Pear Ridge   |  | 91                  | % |  | 90                                | % |  | 95   | % |  | 95   | % |  | 94   | % |  |      | 664   |      |   | 710  |  |      | 727 |      |   | 710 |  |   | 684
|Eagle Crest                |  | 82                  | % |  | 89                                | % |  | 92   | % |  | 91   | % |  | 89   | % |  |      | 646   |      |   | 665  |  |      | 694 |      |   | 682 |  |   | 643
|Remington Hills            |  | 85                  | % |  | 86                                | % |  | 88   | % |  | 91   | % |  | 89   | % |  |      | 776   |      |   | 838  |  |      | 852 |      |   | 843 |  |   | 805
|Estrada Oaks               |  | 83                  | % |  | 89                                | % |  | 93   | % |  | 90   | % |  | 93   | % |  |      | 640   |      |   | 666  |  |      | 662 |      |   | 643 |  |   | 629
|Aspen Hills                |  | 85                  | % |  | 90                                | % |  | 92   | % |  | 90   | % |  | 90   | % |  |      | 526   |      |   | 576  |  |      | 569 |      |   | 550 |  |   | 534
|Mill Crossing              |  | 85                  | % |  | 90                                | % |  | 90   | % |  | 91   | % |  | 91   | % |  |      | 539   |      |   | 575  |  |      | 565 |      |   | 548 |  |   | 536
|Cottonwood                 |  | 75                  | % |  | 87                                | % |  | 93   | % |  | 94   | % |  | 96   | % |  |      | 578   |      |   | 639  |  |      | 596 |      |   | 578 |  |   | 540
|Burney Oaks                |  | 85                  | % |  | 91                                | % |  | 90   | % |  | 93   | % |  | 95   | % |  |      | 657   |      |   | 685  |  |      | 691 |      |   | 678 |  |   | 639
|Copper Crossing            |  | 79                  | % |  | 89                                | % |  | 92   | % |  | 87   | % |  | 90   | % |  |      | 535   |      |   | 544  |  |      | 537 |      |   | 520 |  |   | 506
|The Arbors on Forest Ridge |  | 84                  | % |  | 89                                | % |  | 89   | % |  | 91   | % |  | 91   | % |  |      | 631   |      |   | 660  |  |      | 684 |      |   | 664 |  |   | 650
|Park Village               |  | 91                  | % |  | 92                                | % |  | 96   | % |  | 95   | % |  | 92   | % |  |      | 560   |      |   | 574  |  |      | 599 |      |   | 569 |  |   | 542
|Wildwood                   |  | 90                  | % |  | 91                                | % |  | 93   | % |  | 88   | % |  | 92   | % |  |      | 632   |      |   | 670  |  |      | 685 |      |   | 662 |  |   | 658
|Main Park                  |  | 89                  | % |  | 95                                | % |  | 95   | % |  | 98   | % |  | 97   | % |  |      | 786   |      |   | 788  |  |      | 815 |      |   | 779 |  |   | 733
|Paces Point                |  | 77                  | % |  | 87                                | % |  | 94   | % |  | 93   | % |  | 97   | % |  |      | 600   |      |   | 668  |  |      | 699 |      |   | 669 |  |   | 624
|Silverbrook I              |  | 87                  | % |  | 87                                | % |  | 91   | % |  | 94   | % |  | 95   | % |  |      | 581   |      |   | 620  |  |      | 626 |      |   | 598 |  |   | 559
|Silverbrook II             |  | 80                  | % |  | 89                                | % |  | 90   | % |  | 92   | % |  | 96   | % |  |      | 553   |      |   | 579  |  |      | 578 |      |   | 557 |  |   | 512
|Grayson II                 |  | 89                  | % |  | 89                                | % |  | 92   | % |  | 93   | % |  | 94   | % |  |      | 707   |      |   | 761  |  |      | 762 |      |   | 740 |  |   | 693
|Grayson I                  |  | 91                  | % |  | 92                                | % |  | 94   | % |  | 94   | % |  | 93   | % |  |      | 703   |      |   | 750  |  |      | 743 |      |   | 728 |  |   | 691
|The Meridian               |  | 88                  | % |  | 92                                | % |  | 95   | % |  | 97   | % |  | 98   | % |  |      | 595   |      |   | 644  |  |      | 691 |      |   | 664 |  |   | 612
|Canyon Hills               |  | 90                  | % |  | 88                                | % |  | 93   | % |  | 97   | % |  | 98   | % |  |      | 658   |      |   | 740  |  |      | 809 |      |   | 784 |  |   | 730
|Cutters Point             |  | 81                  | % |  | 85                                | % |  | 91   | % |  | 95   | % |  | 95   | % |  |      | 740   |      |   | 806  |  |      | 832 |      |   | 785 |  |   | 720
|Sierra Ridge               |  | 90                  | % |  | 90                                | % |  | 88   | % |  | 90   | % |  | 90   | % |  |      | 564   |      |   | 555  |  |      | 536 |      |   | 524 |  |   | 509
|Windsor Heights            |  | 89                  | % |  | (4                                | ) |  |     |   |  |     |   |  |     |   |  |      | 1,045 |      |   | 917  |  |      |    |      |   |    |  |   |   
|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    
|                           |  | 87                  | % |  | 89                                | % |  | 91   | % |  | 92   | % |  | 93   | % |  | $    | 678   |      | $ | 686  |  | $    | 799 |      | $ | 674 |  | $ | 646
|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |      |  |      |     |      |   |     |  |   |    



Notes to table of
occupancy rates and average rental rates:



|(1) |  | An open item denotes that the company did not own the property during the period indicated.
|--- |  | -------------------------------------------------------------------------------------------

|(2) |  | Economic occupancy percentage reflects scheduled rent divided by gross potential rent.
|--- |  | --------------------------------------------------------------------------------------

|(3) |  | Average rent per month reflects Decembers monthly gross potential rent divided by the propertys number of units.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(4) |  | This property was acquired in late December 2002, and therefore economic occupancy percentage was not available.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|
|



14



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##### Table of Contents

|Item 3. |  | Legal Proceedings
|------- |  | -----------------



Neither the company nor any of its apartment communities is presently subject to any material litigation nor, to the companys knowledge, is any
material litigation threatened against the company or any of its subsidiaries or apartment communities, other than ordinary routine actions incidental to the companys business, some of which are expected to be covered by insurance and all of
which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the company.



|Item 4. |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------



No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2003.



PART II



|Item 5. |  | Market for Registrants Common Equity and Related Stockholder Matters
|------- |  | ---------------------------------------------------------------------



Common Shares



The companys common shares are traded on the New York Stock Exchange (NYSE) under the symbol TCR. The following table sets
forth the quarterly high and low sale prices per common share on the NYSE for each quarter of the last two years and the cash distributions declared and paid for each quarterly period indicated.



|               |  |      |       |     |   |                                   |  |   |     
|-------------- |  | ---- | ----- | --- | - | --------------------------------- |  | - | ----
|               |  | High |       | Low |   | Cash Distributionper Common Share
|2002           |  |      |       |     |   |                                   |  |   |     
|First Quarter  |  | $    | 11.65 |     | $ | 10.51                             |  | $ | 0.28
|Second Quarter |  |      | 11.58 |     |   | 10.75                             |  |   | 0.28
|Third Quarter  |  |      | 11.20 |     |   | 8.75                              |  |   | 0.28
|Fourth Quarter |  |      | 9.00  |     |   | 6.51                              |  |   | 0.28
|               |  |      |      
|2003           |  |      |       |     |   |                                   |  |   |     
|First Quarter  |  | $    | 8.25  |     | $ | 6.85                              |  | $ | 0.28
|Second Quarter |  |      | 8.12  |     |   | 6.90                              |  |   | 0.20
|Third Quarter  |  |      | 8.50  |     |   | 7.11                              |  |   | 0.20
|Fourth Quarter |  |      | 9.39  |     |   | 8.00                              |  |   | 0.20



On March 1, 2004, the
closing sale price of our common stock was $9.20 per share on the NYSE, and there were 1,843 shareholders of record of the 55,651,702 outstanding shares of common stock.



Distributions of $45.3 million and $53.5 million were made to the shareholders during 2003 and 2002, respectively.



The timing and amounts of distributions to shareholders are
within the discretion of the companys board of directors. Future distributions will depend on the companys results of operations, cash flow from operations, economic conditions and other factors, such as working capital, cash
requirements to fund investing and financing activities, capital expenditure requirements, including improvements to and expansions of properties and the acquisition of additional properties, as well as the distribution requirements under federal
income tax provisions for qualification as a REIT. The companys distributions to its shareholders also may be limited by the agreements pertaining to the companys secured lines of credit.



For federal income tax purposes, distributions paid to common shareholders
may consist of ordinary income, capital gains distributions, non-taxable return of capital, or a combination thereof. Distributions



15



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##### Table of Contents

constitute ordinary income to the extent of the companys current and accumulated earnings and profits. Distributions which exceed the companys
current and accumulated earnings and profits constitute a return of capital rather than a dividend to the extent of a shareholders basis in his common shares and reduce the shareholders basis in the common shares. To the extent that a
distribution exceeds both the companys current and accumulated earnings and profits and the shareholders basis in his common shares, it is generally treated as gain from the sale or exchange of that shareholders common shares. The
company notifies shareholders annually as to the taxability of distributions paid during the preceding year. In 2003, approximately 92.6% of distributions on common shares represented a return of capital, 5.0% represented ordinary income and 2.4%
represented long-term capital gain.



The company has a Dividend
Reinvestment and Share Purchase Plan (as amended, the Plan) which allows any record holder to reinvest distributions without payment of any brokerage commissions or other fees. Of the total proceeds raised from common shares during the
years ended December 31, 2003, 2002, and 2001, $5.4 million, $6.8 million, and $6.5 million, respectively, were provided through the reinvestment of distributions.



In addition, the Plan has a direct purchase feature in which investors may acquire common shares by making cash payments
without payment of any brokerage commissions or other fees. During 2003 and 2002, direct purchases accounted for $0.7 million and $0.8 million, respectively, of the proceeds raised under the Plan.



In September 2000, the Board of Directors authorized the repurchase of up to
an additional $50 million of the companys common shares. Under this authorization, the company has, as of December 31, 2003, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of $21.3 million. For
the year ended December 31, 2003, the company repurchased 26,550 common shares at an average price of $7.17 per share for a total cost of $0.2 million.



Preferred Shares



The company declared and paid total distributions of $2.3752 per share on the Series A Convertible Preferred Shares during 2003 and 2002. At December 31,
2003 and 2002, a total of 127,380 preferred shares remained outstanding.



|Item 6. |  | Selected Financial Data
|------- |  | -----------------------



The following table sets forth selected consolidated financial and other information as of and for each of the years in the five-year period ended
December 31, 2003. The table should be read in conjunction with our consolidated financial statements and the notes thereto, and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere
in this Report.



16



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##### Table of Contents

|                                                                                                                     |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | -------- | - |  | - | ------- | -
|                                                                                                                     |  | As of December 31,                                                    |          
|                                                                                                                     |  | 2003                                                                  |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |         
|                                                                                                                     |  | (in thousands, except per share data and apartment communities owned) |          
|Operating Results                                                                                                    |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Rental and property income                                                                                           |  | $                                                                     | 171,652   |   |      | $ | 159,866   |      |  | $ | 149,713   |   |  | $    | 143,574  |   |  | $ | 119,282 |  
|Net (loss) income before gain on sales of investments and minority interest of unit holders in operating partnership |  |                                                                       | (9,432    | ) |      |   | (555      | )    |  |   | 17,117    |   |  |      | 34,202   |   |  |   | 29,590  |  
|Discontinued operations(Loss) income from discontinued operations                                                    |  |                                                                       | (15       | ) |      |   | 739       |      |  |   | 880       |   |  |      |         |   |  |   |        |  
|Gain on sales of investments                                                                                         |  |                                                                       | 1,887     |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |        |  
|Gain on sales of investments                                                                                         |  |                                                                       |          |   |      |   |          |      |  |   |          |   |  |      | 22,930   |   |  |   |        |  
|Net (loss) income                                                                                                    |  |                                                                       | (7,298    | ) |      |   | 220       |      |  |   | 17,990    |   |  |      | 58,144   |   |  |   | 30,037  |  
|Distributions to preferred shareholders                                                                              |  |                                                                       | 303       |   |      |   | 303       |      |  |   | 7,698     |   |  |      | 30,305   |   |  |   | 12,323  |  
|Excess consideration paid over book value to preferred shareholders                                                  |  |                                                                       |          |   |      |   |          |      |  |   | 27,492    |   |  |      |         |   |  |   |        |  
|Net (loss) income available to common shareholders                                                                   |  |                                                                       | (7,601    | ) |      |   | (83       | )    |  |   | (17,200   | ) |  |      | 27,839   |   |  |   | 17,714  |  
|Distributions to common shareholders                                                                                 |  |                                                                       | 45,316    |   |      |   | 53,482    |      |  |   | 45,905    |   |  |      | 40,251   |   |  |   | 42,050  |  
|Per Share                                                                                                            |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Net (loss) income per common share-basic and diluted from continued operations                                       |  | $                                                                     | (0.18     | ) |      | $ | (0.02     | )    |  | $ | (0.42     | ) |  | $    | 0.05     |   |  | $ | 0.24    |  
|Net income per common share-basic and diluted from discontinued operations                                           |  | $                                                                     | 0.04      |   |      | $ | 0.02      |      |  | $ | 0.02      |   |  | $    | 0.72     |   |  | $ | 0.21    |  
|Net (loss) income per common share                                                                                   |  | $                                                                     | (0.14     | ) |      | $ | 0.00      |      |  | $ | (0.40     | ) |  | $    | 0.77     |   |  | $ | 0.45    |  
|Distributions per preferred share                                                                                    |  | $                                                                     | 2.38      |   |      | $ | 2.38      |      |  | $ | 2.31      |   |  | $    | 2.19     |   |  | $ | 0.97    |  
|Distributions per common share                                                                                       |  | $                                                                     | 0.88      |   |      | $ | 1.12      |      |  | $ | 1.12      |   |  | $    | 1.10     |   |  | $ | 1.07    |  
|Distributions representing return of capital-tax basis                                                               |  |                                                                       | 93        | % |      |   | 70        | %    |  |   | 32        | % |  |      | 41       | % |  |   | 11      | %
|Weighted average shares outstanding-basic                                                                            |  |                                                                       | 52,643    |   |      |   | 48,068    |      |  |   | 43,450    |   |  |      | 36,081   |   |  |   | 39,183  |  
|Balance Sheet Data                                                                                                   |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Investment in rental property-gross                                                                                  |  | $                                                                     | 1,307,420 |   |      | $ | 1,158,827 |      |  | $ | 1,070,867 |   |  | $    | 866,841  |   |  | $ | 917,474 |  
|Total assets                                                                                                         |  | $                                                                     | 1,124,442 |   |      | $ | 1,014,847 |      |  | $ | 980,691   |   |  | $    | 799,781  |   |  | $ | 869,265 |  
|Notes payable-unsecured                                                                                              |  | $                                                                     |          |   |      | $ | 77,913    |      |  | $ | 55,000    |   |  | $    | 13,210   |   |  | $ | 157,500 |  
|Notes payable-secured                                                                                                |  | $                                                                     | 801,754   |   |      | $ | 604,446   |      |  | $ | 554,600   |   |  | $    | 245,423  |   |  | $ | 105,046 |  
|Shareholders equity                                                                                                 |  | $                                                                     | 286,005   |   |      | $ | 287,074   |      |  | $ | 333,834   |   |  | $    | 522,002  |   |  | $ | 574,365 |  
|Common shares outstanding                                                                                            |  |                                                                       | 55,534    |   |      |   | 48,361    |      |  |   | 47,665    |   |  |      | 34,926   |   |  |   | 38,712  |  
|Other Data                                                                                                           |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Cash flow from:                                                                                                      |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Operating activities                                                                                                 |  | $                                                                     | 41,678    |   |      | $ | 46,815    |      |  | $ | 51,836    |   |  | $    | 53,913   |   |  | $ | 63,010  |  
|Investing activities                                                                                                 |  | $                                                                     | (7,884    | ) |      | $ | (36,471   | )    |  | $ | (79,796   | ) |  | $    | 50,254   |   |  | $ | (31,144 | )
|Financing activities                                                                                                 |  | $                                                                     | (33,781   | ) |      | $ | (17,620   | )    |  | $ | 32,475    |   |  | $    | (116,294 | ) |  | $ | (18,187 | )
|Number of apartment communities owned at year-end                                                                    |  |                                                                       | 89        |   |      |   | 82        |      |  |   | 80        |   |  |      | 72       |   |  |   | 87      |  
|Funds from operations calculation                                                                                    |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Net (loss) income                                                                                                    |  | $                                                                     | (7,298    | ) |      | $ | 220       |      |  | $ | 17,990    |   |  | $    | 58,144   |   |  | $ | 30,037  |  
|Adjustments:                                                                                                         |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Gain on sales of investments                                                                                         |  |                                                                       | (1,887    | ) |      |   |          |      |  |   |          |   |  |      | (22,930  | ) |  |   |        |  
|Depreciation and amortization of real estate assets                                                                  |  |                                                                       | 52,956    |   |      |   | 46,021    |      |  |   | 39,999    |   |  |      | 36,295   |   |  |   | 29,310  |  
|Minority interest of unit holders in operating partnership                                                           |  |                                                                       | (262      | ) |      |   | (36       | )    |  |   |          |   |  |      |         |   |  |   |        |  
|Other                                                                                                                |  |                                                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   | 141     |  
|                                                                                                                     |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Funds from operations (a)                                                                                            |  | $                                                                     | 43,509    |   |      | $ | 46,205    |      |  | $ | 57,989    |   |  | $    | 71,509   |   |  | $ | 59,488  |  
|                                                                                                                     |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  



17



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---

|(a) |  | Funds from Operations (FFO) is defined as net income (computed in accordance with generally accepted accounting principles) excluding gains and (losses) from sales of depreciable
property, minority interest of unit holders in operating partnerships, plus depreciation. This definition conforms with the National Association of Real Estate Investment Trusts (NAREIT) definition issued in October 1999 which was effective
beginning January 1, 2000. The companys management believes that FFO provides investors with an understanding of the companys ability to incur and service debt and make capital expenditures. The company considers FFO in evaluating
property acquisitions and its operating performance and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the companys activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to fund cash needs. In addition, there can be no assurance that the companys basis for computing FFO is comparable with that of other real estate investment trusts.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 7. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------



Overview



Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, the company) is a self-administered and
self-managed REIT headquartered in Richmond, Virginia. The business of the company is to acquire, develop and manage existing residential apartment communities located in the southern United States. As of December 31, 2003, the company owned 89
apartment communities, which comprised a total of 23,189 apartment homes. The companys apartment communities are located in Georgia, North Carolina, South Carolina, Texas and Virginia.



The company owns and operates multifamily apartment communities that generate
rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The company separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities
has similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single apartment communities segment. All segment disclosure is included in or can be derived from the companys
consolidated financial statements.



The companys
operations are affected by the following factors: demand for apartment communities in the companys markets and the effect on occupancy levels and rental rates, job growth, overbuilding of apartment communities, low mortgage interest rates and
the availability of refinancing.



On May 28, 2003, the company
completed the acquisition of Merry Land Properties, Inc. (Merry Land), which owned nine apartment communities containing 1,966 apartment homes located in South Carolina and Georgia, interests in two joint ventures, two parcels of
undeveloped land that the company plans to develop into additional apartment homes and a third party property management business. The purchase price was $159.1 million, which includes the issuance of equity, assumption of debt and the fair value
adjustment to debt.



In conjunction with the Merry Land merger,
the company acquired a third party property management business which included six apartment communities. As of December 31, 2003, the company managed seven apartment communities with 1,828 apartment homes.



The company, as the general partner, also has approximately an 84% interest
in the Cornerstone NC Operating Limited Partnership. This partnership holds certain apartment communities in North Carolina and was formed by the company and the prior owner, which is a minority limited partner and is not otherwise related to the
company.



The company uses property operating income (rental
income less property operating expenses as defined below) as a measure to evaluate performance of the apartment communities. Property operating income is not deemed to be an alternative to net income, as determined in accordance with generally
accepted accounting principles. In addition, this measure, as calculated by the company, may not be comparable to similarly entitled measures reported by other companies.Property operating expenses include the following expense categories:



18



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##### Table of Contents

property and maintenance, taxes and insurance and property management. Property operating income increased 2.9% to $93.1 million in 2003 from $90.4
million in 2002. Overall rental revenues were down due to higher vacancies and a decline in the average rental rates. Operating property expenses were higher due to an increase in utility costs, real estate assessments and tax rates, insurance costs
and turnover costs incurred due to higher vacancies. Interest expense increased to $45.9 million in 2003 from $41.7 million in 2002. Depreciation and amortization of real estate assets increased $7.6 million during 2003 over 2002. The company
reported net loss available to common shareholders of $7.6 million due to the items mentioned above. Each of these items will be described in further detail later in our discussion.



The company operated in 18 markets overall. At December 31, 2003, the companys three largest markets comprised
51% of its real estate owned, at cost. The following table summarizes the companys apartment market information (dollars in thousands):



|                              |  |                               |  |            |           |                         |        |                             |     |   |                                  |    |   |  |    |  
|----------------------------- |  | ----------------------------- |  | ---------- | --------- | ----------------------- | ------ | --------------------------- | --- | - | -------------------------------- | -- | - |  | -- | -
|Market                        |  | Number ofApartmentCommunities |  | Total Cost |           | Number ofApartmentHomes |        | % of TotalCost ofApartments |     |   | Annual AverageEconomic Occupancy |   
|                              |  |                               |  |            | 2003      |                         |        | 2002                        |    
|Dallas/Fort Worth, TX         |  | 26                            |  | $          | 318,074   |                         | 6,776  |                             | 24  | % |                                  | 84 | % |  | 89 | %
|Charlotte, NC                 |  | 12                            |  |            | 189,974   |                         | 3,127  |                             | 15  | % |                                  | 83 | % |  | 85 | %
|Raleigh/Durham, NC            |  | 10                            |  |            | 150,384   |                         | 2,428  |                             | 12  | % |                                  | 87 | % |  | 86 | %
|Atlanta, GA                   |  | 6                             |  |            | 119,158   |                         | 1,841  |                             | 9   | % |                                  | 83 | % |  | 86 | %
|Richmond, VA                  |  | 6                             |  |            | 102,383   |                         | 1,693  |                             | 8   | % |                                  | 92 | % |  | 92 | %
|Charleston, SC                |  | 6                             |  |            | 96,361    |                         | 1,544  |                             | 7   | % |                                  | 94 | % |  | 90 | %
|Savannah, GA                  |  | 5                             |  |            | 80,021    |                         | 1,078  |                             | 6   | % |                                  | 90 | % |  |   |  
|Virginia Beach, VA            |  | 4                             |  |            | 39,790    |                         | 909    |                             | 3   | % |                                  | 95 | % |  | 96 | %
|Other (10 markets)            |  | 14                            |  |            | 205,825   |                         | 3,793  |                             | 16  | % |                                  | 87 | % |  | 89 | %
|                              |  |                               |  |            |           |                         |        |                             |     |   |                                  |    |   |  |    |  
|                              |  |                               |  |            | 1,301,970 |                         | 23,189 |                             | 100 | % |                                  |    |   |  |    |  
|Real estate under development |  |                               |  |            | 5,450     |                         |       |                             |    |   |                                  |   |   |  |   |  
|                              |  |                               |  |            |           |                         |        |                             |     |   |                                  |    |   |  |    |  
|                              |  | 89                            |  | $          | 1,307,420 |                         | 23,189 |                             | 100 | % |                                  | 87 | % |  | 89 | %
|                              |  |                               |  |            |           |                         |        |                             |     |   |                                  |    |   |  |    |  



The following
discussion is based on the financial statements of the company as of December 31, 2003, 2002, and 2001. This information should be read in conjunction with the selected financial data and the companys consolidated financial statements included
elsewhere in this annual report.



Results of Operations



Comparison of the year ended December 31, 2003 to the year ended
December 31, 2002



Income and Occupancy



During 2003, the company was still experiencing weakness
in occupancy rates and decreases in rental rates as a result of the slow recovery from the recession, new apartment construction, and the strength of the single family housing industry.



The companys property operations for the year ended December 31, 2003 include the results of operations of 89
apartment communities acquired to date, including apartment communities acquired through the Merry Land merger on May 28, 2003. The operations of the two apartment communities sold during the first quarter of 2003 are reflected in discontinued
operations. The increases in revenue are primarily due to the effect of the rental income generated from the apartment communities acquired through the Merry Land merger and the full effect in 2003 of the two apartment communities acquired and
the two phases to existing apartment communities completed in 2002; however, the increase was offset by the increase in rental concessions and the decrease in economic occupancy levels, discussed below, which resulted from the continuing soft market
conditions in the major markets in which the company operates.



19



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The principle source of the companys revenue is the rental operation of its apartment communities.
Rental income increased 6.4% in 2003 to $163.1 million, up $9.8 million over 2002. Rental income from the Merry Land merger and the 2002 acquisitions accounted for the majority of the increase. In addition, the company recorded a charge in 2002 of
approximately $1.1 million due to a change in the estimate of the collectibility of tenant receivables. The increase in rental income is offset in part by a reduction in average economic occupancy from 89% in 2002 to 87% in 2003, an increase in
rental concessions and a decline in the average rental rate. Average rental rate per apartment home in 2003 was $678 and $686 in 2002, a decline of 2%.



Other property income increased $2.0 million in 2003 over 2002. Other property income included reimbursement for sub-metering of utilities and ancillary
income. For the year ended December 31, 2003, other property income also included approximately $0.6 million in excess recoveries from casualty insurance over the cost of the damage. The majority of the increase related to the increase in
sub-metering income of $1.4 million and the addition of the third party management business in the amount of $0.3 million.



The company will continue to add revenue-enhancing improvements in an effort to improve the apartment communities marketability, economic
occupancies, and rental rates.



Expenses



Property operating expenses include the following expense categories:
property and maintenance, taxes and insurance and property management. These categories primarily consist of property taxes and insurance, repairs and maintenance, utilities, payroll costs and advertising and marketing. Property operating expenses
in 2003 were $78.6 million and $69.4 million in 2002. The increase is primarily due to the incremental effect of the Merry Land merger and the full effect in 2003 of the 2002 acquisitions. The increases in real estate assessments and tax rates,
utilities costs, property insurance costs, and turnover costs due to the increase in vacancy also contributed to the increase in property operating expenses. The property operating expense ratio (the ratio of property operating expenses to rental
income) was 48.2% and 45.3% for 2003 and 2002, respectively due to the increases mentioned above.



Depreciation and amortization of real estate assets increased to $52.8 million in 2003 from $45.2 million in 2002, and is directly attributable to a full
year of depreciation of the 2002 acquisitions, depreciation on the 2003 acquisitions from their respective acquisition dates and the depreciation associated with capital improvements made during 2003 and 2002. In addition, in conjunction with the
Merry Land merger, the company allocated a portion of the Merry Land purchase price to an intangible asset based on a valuation of in-place leases at the time of the merger in the amount of $1.1 million. None of the intangible asset value was
attributable to above or below market rates, but rather attributable to foregone costs associated with having in-place leases. The company recorded $0.9 million of amortization of the net intangibles in 2003.



General and administrative expenses totaled 2.3% and 2.5% of rental income in
2003 and 2002, respectively. These expenses represent the administrative expenses of the company as distinguished from the property operating expenses of the companys apartment communities. The decrease is due to increased capitalization of
certain costs.



Interest Income



The companys interest income increased $0.3 million for the year ended
December 31, 2003 over 2002. The majority of the increase is due to the interest income earned on the notes receivables assumed in connection with the Merry Land merger.



Interest Expense



The company incurred $45.9 million and $41.7 million of interest expense in 2003 and 2002, respectively, associated with borrowings under its secured and
unsecured lines of credit, existing and assumed mortgage notes,



20



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##### Table of Contents

amortization of deferred financing costs and interest associated with the companys capital leases. The increase was principally a result of the
following:



| |  |  | $3.6 million of the increase related to the interest on the existing and assumed fixed and variable mortgage notes. The increase was due to the interest expense associated with the
mortgage notes assumed with the Merry Land merger, a full year of interest expense on the $53.6 million of secured debt placed or assumed in 2002, and the $101.8 million refinancing completed in 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.5 million of the increase related to the amortization of the deferred financing cost associated with the $151.8 million financings. (See Note 5 to the consolidated financial
statements.)
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.2 million of the increase related to interest associated with the companys capital leases.
| | - |  | ----------------------------------------------------------------------------------------------



The increase was partially offset by $0.1 million decrease related to the interest on the secured and unsecured lines of
credit.



The overall weighted average interest rate for all
borrowings was 5.9% and 6.5% during 2003 and 2002, respectively. Interest expense is reduced by the amortization of the fair value premium adjustment recorded in connection with the assumption of above market rate debt in connection with the
acquisition of apartment communities. The premiums are amortized over the remaining term of the related indebtedness on the effective interest method. Average debt, secured and unsecured, increased from $630 million in 2002 to $753 million in 2003.
The increase is due to the full effect of the fixed and variable rate borrowings obtained or assumed in 2002 and the incremental effect of the 2003 fixed and variable rate borrowing obtained or assumed in 2003.



Income from Discontinued Operations



During the first quarter of 2003, the company sold two apartment communities
containing a total of 395 apartment homes for a total sales price of $15.9 million and recognized a gain of $1.9 million. As a result of the sales, the companys financial statements presented have been prepared with these two apartment
communities results of operations and the gain from sale isolated and shown as discontinued operations. Income from discontinued operations decreased from 2003 to 2002 due to the timing of the sale. All historical statements have
been restated to conform to this presentation in accordance with SFAS No. 144.



Net Loss Available to Common Shareholders



Net loss available to common shareholders was $7.6 million ($0.14 per share) for the year ended December 31, 2003, compared to $0.1 million ($0.00 per share) for the prior year. The increase in net loss available to
common shareholders resulted primarily from the increase in property operating expenses, interest expense and depreciation and amortization of real estate assets exceeding the increase in total revenues. The gain recognized on the sales of two
apartment communities during 2003 offset this decrease which is included in the income from discontinued operations (see Note 2 to the consolidated financial statements).



Comparable Property Operations



Property operating income is a measure the company uses to evaluate performance and is not deemed to be an alternative to
net income, as determined in accordance with generally accepted accounting principles. In addition, this measure, as calculated by the company, may not be comparable to similarly entitled measures reported by other companies. The companys
same-community portfolio consists of 74 stabilized apartment communities, containing 20,127 apartment homes, that the company has owned since January 1, 2002, representing approximately 87% of the companys 23,189 apartment homes.
The two apartment communities sold in the first quarter of 2003 have been eliminated from the calculation. Property management expenses are excluded from this evaluation. For 2003, same-community property operating income (rental income
less property operating expenses) decreased 7%, rental income decreased 3% and property operating expenses increased 4% over 2002. The decrease in rental income is primarily due to the soft overall market conditions,



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which resulted in increased rental concessions and lower average occupancies. The companys property operating expenses increased primarily due to
higher utility costs, real estate assessments and property insurance costs. Average monthly rental rates for the same-community portfolio decreased 4% to $661 per apartment home in 2003 from $685 per apartment home in 2002.



In order to make a meaningful comparison of property operating income for
these apartment communities, the write-offs of tenant receivables and a one-time reduction to expenses were excluded. If this adjustment had been considered for the years ended December 31, 2003 and 2002, property operating income would have
decreased 9%; total revenues would have decreased 3%; and property operating expenses would have increased 5%.



Property operating expenses primarily consist of property taxes and insurance, repairs and maintenance, utilities, payroll costs, and advertising and
marketing. In addition, property operating expenses exclude depreciation, general and administrative, other expenses, interest income and expense and minority interest, as these are not considered in the operating performance of the apartment
communities.



The following is a reconciliation of the
same community property operating income to net (loss) income as determined in accordance with generally accepted accounting principles (in thousands):



|                                                           |  |      |         |   |      |   |         |  
|---------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                           |  | 2003 |         |   | 2002 |  
|Comparable properties (same communities)                   |  |      |         |   |      |   |         |  
|Rental and other property income                           |  | $    | 158,146 |   |      | $ | 162,652 |  
|Property operating expenses                                |  |      | (66,637 | ) |      |   | (64,138 | )
|                                                           |  |      |         |   |      |   |         |  
|Property operating income                                  |  |      | 91,509  |   |      |   | 98,514  |  
|Non-comparable properties (remaining communities)          |  |      |         |   |      |   |         |  
|Rental and other property income                           |  |      | 21,407  |   |      |   | 4,857   |  
|Property operating expenses                                |  |      | (7,843  | ) |      |   | (2,099  | )
|                                                           |  |      |         |   |      |   |         |  
|Property operating income                                  |  |      | 13,564  |   |      |   | 2,758   |  
|Unallocated expenses                                       |  |      | (7,901  | ) |      |   | (7,040  | )
|Depreciation and amortization of real estate assets        |  |      | (52,794 | ) |      |   | (45,157 | )
|Property management                                        |  |      | (4,102  | ) |      |   | (3,798  | )
|General and administrative                                 |  |      | (3,824  | ) |      |   | (3,904  | )
|Other depreciation                                         |  |      | (23     | ) |      |   | (24     | )
|Other                                                      |  |      | (239    | ) |      |   | (251    | )
|Interest income                                            |  |      | 274     |   |      |   | 31      |  
|Interest expense                                           |  |      | (45,896 | ) |      |   | (41,684 | )
|Minority interest of unit holders in operating partnership |  |      | 262     |   |      |   | 36      |  
|Net income from discontinued operations                    |  |      | 1,872   |   |      |   | 739     |  
|                                                           |  |      |         |   |      |   |         |  
|Net (loss) income                                          |  | $    | (7,298  | ) |      | $ | 220     |  
|                                                           |  |      |         |   |      |   |         |  



Results of Operations



Comparison of the year ended December 31, 2002 to
the year ended December 31, 2001



Income and
Occupancy



The companys property operations for the
year ended December 31, 2002 included the results of operations for the entire year from 80 apartment communities acquired before 2002 and from the respective acquisition dates of the four apartment communities acquired in 2002. The company owned 82
apartment communities at December 31, 2002. Two of the four 2002 acquisitions included two new phases at two existing apartment communities owned by the company. The increases in rental revenues and property operating expenses for the year ended
December 31, 2002 over the same period in 2001 are primarily due to the effect of a full year of operation in 2002 of the 2001 acquisitions as well as the incremental effect of the 2002 acquisitions.In addition,



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the company in the third quarter of 2002 recorded a charge of approximately $1.1 million due to a change in the estimate of the collectibility of tenant
receivables. The increase in rental revenues is offset in part by a reduction in average economic occupancy from 91% in 2001 to 89% in 2002 and an increase in rental concessions which are both attributable to softening in overall market conditions
in the major markets in which the company operates.



Rental
income increased 7.7% in 2002 to $153.3 million, up $10.9 million over 2001. The increase in rental income is primarily due to the factors described above.



Expenses



Property operating expenses in 2002 were $69.4 million and $59.6 million in 2001. The increase is primarily due to the full effect in 2002 of the 2001
acquisitions and the incremental effect of 2002 acquisitions. The increases in property insurance costs, real estate assessments and tax rates and turnover costs due to the increase in vacancy also contributed to the increases in property operating
expenses. The property operating expense ratio (the ratio of property operating expenses to rental income) was 45.3% and 41.9% for 2002 and 2001, respectively.



Depreciation of real estate increased to $45.2 million in 2002 from $39.1 million in 2001, and is directly attributable to a full year of depreciation
of the 2001 acquisitions, depreciation on the 2002 acquisitions from their respective acquisition dates and the depreciation associated with capital improvements made during 2002 and 2001.



General and administrative expenses totaled 2.5% and 2.3% of rental income in
2002 and 2001, respectively.



Interest Income



The company earned interest income of $30,988 in 2002 and
$0.5 million in 2001 from the investment of its cash and cash reserves. The decrease in 2002 is due to a decrease in average invested funds coupled with lower interest rates. In 2001, the company had $46.7 million invested pending its tender offer
on April 18, 2001 for the companys outstanding Series A Convertible Preferred Shares.



Interest Expense



The
company incurred $41.7 million and $30.9 million of interest expense in 2002 and 2001, respectively, associated with borrowings under its unsecured lines of credit, existing and assumed mortgage notes, amortization of deferred financing costs. The
increase was principally a result of the following:



| |  |  | $11.4 million of the increase related to the interest on the existing and assumed fixed and variable mortgage notes. The increase is due to the full year of interest on the fixed
and variable rate mortgage notes placed or assumed on 26 apartment communities during 2001 and the addition of $53.6 million of secured debt placed or assumed on four apartment communities in 2002.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of the increase related to the amortization of the deferred financing costs.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | $0.7 million of the increase related to the interest on the unsecured lines of credit. During 2002, an additional $25 million was borrowed under this arrangement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



The overall weighted average interest rate for
all borrowings was 6.5% and 6.8% during 2002 and 2001, respectively. Average debt, secured and unsecured, increased from $451 million in 2001 to $630 million in 2002. The increase is due to the full effect of the fixed and variable rate borrowings
obtained or assumed in 2001 and the incremental effect of the 2002 fixed and variable rate borrowing obtained or assumed in 2002. This increase was offset in part by decreasing interest rates on the companys unsecured lines of credit during
2002.



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Net Loss Available to Common Shareholders



Net loss available to common shareholders was $0.1 million ($0.00 per share)
for the year ended December 31, 2002, compared to $17.2 million ($0.40 per share) for the prior year. The decrease in net loss available to common shareholders resulted primarily from the excess consideration paid over the carrying value of the
companys Series A Convertible Preferred Shares in 2001. This decrease was offset by an increase in interest expense and depreciation expense.



Comparable Property Operations



The companys same-community portfolio consists of 69 stabilized apartment communities, containing 17,254 apartment homes, that the
company has owned since January 1, 2001, representing approximately 80% of the companys 21,618 apartment homes. The two apartment communities sold in 2003 are included for this calculation. For 2002, same-community property
operating income, excluding property management expense, decreased 9%, rental income decreased 3% and property operating expenses increased 5% over 2001. The decrease in rental income is primarily due to the softening in the overall market
conditions, which resulted in increased rental concessions and lower average occupancies. The company also experienced an increase in property operating expenses as a result of increased costs to rent vacant apartments along with increases in
property insurance costs and real estate taxes. Average monthly rental rates for the same-community portfolio decreased 1% to $677 per apartment home in 2002 from $681 per apartment home in 2001.



In order to make a meaningful comparison of property operating income for
these apartment communities, a one-time charge to tenant receivable of $1.1 million as well as $0.3 million of other charges were excluded as these items occurred in 2002. If the adjustments had been considered for 2002 over 2001, property operating
expenses increased 4%; property operating income decreased 10%; and rental income decreased 5%. In addition, property operating income excludes depreciation, amortization, general and administrative, other expenses, interest income and expenses and
minority interest, as these are not considered in the operating performance of the apartment communities.



The following is a reconciliation of the adjusted same community property operating income to net income as determined in accordance with
generally accepted accounting principles (in thousands):



|                                                           |  |      |         |   |      |   |         |  
|---------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                           |  | 2002 |         |   | 2001 |  
|Comparable properties (same communities)                   |  |      |         |   |      |   |         |  
|Rental and other property income                           |  | $    | 134,096 |   |      | $ | 138,748 |  
|Property operating expenses                                |  |      | (56,295 | ) |      |   | (53,556 | )
|                                                           |  |      |         |   |      |   |         |  
|Property operating income                                  |  |      | 77,801  |   |      |   | 85,192  |  
|Non-comparable properties (remaining communities)          |  |      |         |   |      |   |         |  
|Rental and other property income                           |  |      | 28,622  |   |      |   | 13,920  |  
|Property operating expenses                                |  |      | (9,858  | ) |      |   | (4,190  | )
|                                                           |  |      |         |   |      |   |         |  
|Property operating income                                  |  |      | 18,764  |   |      |   | 9,730   |  
|Unallocated expenses                                       |  |      | (730    | ) |      |   |        |  
|Depreciation of rental property                            |  |      | (46,021 | ) |      |   | (39,999 | )
|Property management                                        |  |      | (3,798  | ) |      |   | (3,049  | )
|General and administrative                                 |  |      | (3,904  | ) |      |   | (3,309  | )
|Other depreciation                                         |  |      | (24     | ) |      |   | (26     | )
|Other                                                      |  |      | (251    | ) |      |   | (87     | )
|Interest income                                            |  |      | 31      |   |      |   | 497     |  
|Interest expense                                           |  |      | (41,684 | ) |      |   | (30,952 | )
|Minority interest of unit holders in operating partnership |  |      | 36      |   |      |   | (7      | )
|                                                           |  |      |         |   |      |   |         |  
|Net income                                                 |  | $    | 220     |   |      | $ | 17,990  |  
|                                                           |  |      |         |   |      |   |         |  



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Related-Party Transactions



During 2003, Mr. Glade M. Knight, the companys Chairman and Chief Executive Officer, served as Chairman and Chief
Executive Officer of three extended-stay hotel REITs, Apple Suites, Inc., Apple Hospitality Two, Inc., and Apple Hospitality Five, Inc., and also owned companies which provided services to these entities. Apple Hospitality Two, Inc. acquired Apple
Suites, Inc. in a merger transaction during the first quarter of 2003. During 2003 and 2002, the company provided real estate acquisition and offering-related and other services to these entities and received payment of approximately $0.2 million
and $0.6 million, respectively.



Liquidity and Capital Resources



Liquidity is the ability to meet present and future
financial obligations either through the sale of existing assets or by the acquisition of additional funds through working capital management. Both the coordination of asset and liability maturities and effective working capital management are
important to the maintenance of liquidity. The companys primary sources of liquidity are cash flows from operations as determined by rental rates, occupancy levels and property operating expenses; proceeds from its lines of credit;
reinvestment of distributions; and proceeds from secured debt.



The companys demands for liquidity include normal property operating activities, payment of principal and interest on outstanding debt, capital expenditures, acquisition of apartment communities, payment of distributions and
development costs.



The company has met and expects to continue
to meet short-term liquidity requirements, generally through the cash flow from operations, equity raised from its dividend reinvestment plan, and borrowings on its lines of credit. It is expected that these will be adequate to meet all normal
property operating expenses, payment of distributions, budgeted capital improvements, and scheduled principal and interest payments on debt in 2004. At December 31, 2003, the company had $36 million available under its lines of credit and $1.4
million in cash and cash equivalents. In addition, the company had $9.9 million in reserves held by various lenders for capital expenditures, real estate taxes and insurance.



The company expects to meet certain long-term liquidity requirements, such as scheduled debt maturities, the repayment of
financing on development activities, and possible property acquisitions, through secured borrowings, possible refinancing, disposition of certain assets that, in our evaluation, may no longer meet our investment requirements or issuance of operating
partnership units.



Our long-term ability to pay distributions
to our various stakeholders is dependent upon cash flows from our apartment communities. While we have substantial cash flow from our operations, on a short-term basis, our cash flow is less than our cash needs and we have had to seek alternative
funding sources. During 2003, our cash flow from operating activities was $41.7 million. Cash required to fund capital improvements to our apartment communities was $13.7 million. Distributions to our preferred stockholders, operating partnership
unit holders and common stockholders were approximately $47.3 million in 2003. We funded the excess of our distributions over our cash flow from ordinary course, short-term borrowings of $8.3 million. In addition, sales of two properties, executed
as a part of our long-term business strategy, also provided approximately $15 million. The sales of these properties did not have a material impact upon our property operating income.



In the event that there continues to be an economic downturn or the national economy does not recover sufficiently and the
cash flow from operations are no longer adequate, the company has additional means, such as its borrowing availability on its lines of credit, to help meet our short term liquidity demands.



The company considers on a regular basis what level of distributions to
common shareholders is appropriate, and there is no assurance that the companys distribution to common shareholders will continue at the current level.



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Operating Activities



For the year ended December 31, 2003, our net cash provided by operating activities was $41.7 million, compared to $46.8
million for the same period in 2002. This decline is due primarily to the economic downturn in the national economy and the related decline in our operating activities.



Investing Activities



For the year ended December 31, 2003, our net cash used in investing activities was $7.9 million compared to $36.5 million for the same period in 2002.
In 2003, our investing activities related to investments in acquisitions and in our existing apartment communities through capital expenditures and redevelopment, as well dispositions of apartment communities.



Acquisitions



On May 28, 2003, the company completed the acquisition of Merry Land, which
owned nine apartment communities in South Carolina and Georgia containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the company plans to develop into additional apartment homes, and a
third party property management business. The acquisition was structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as a tax-free reorganization and was accounted for under the
purchase method of accounting. The company used various valuation methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of in-place leases and debt assumed. The purchase price was
$159.1 million, which includes the issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger agreement, each Merry Land shareholder received 1.818 of the
companys common shares and 0.220 of the companys Series B convertible preferred shares. A total of 5.0 million common shares and 0.6 million of the companys Series B convertible preferred shares were issued as a result of the
merger. The Series B convertible preferred shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of Merry Lands debt with a fair value of
$110.5 million at the date of assumption. No goodwill was recorded as a result of this transaction.



Real Estate under Development



The company has three development projects, two of which were assumed with the Merry Land merger mentioned above and are to be completed during 2005. The
companys share of estimated future cash expenditures to complete these projects will be funded through advances on future construction loans.



Disposal of Investments



During the first quarter of 2003, the company sold two apartment communities containing a total of 395 apartment homes for a total sales price of $15.9
million with net proceeds of $15.0 million and recognized a gain of $1.3 million. As a result of the sales, the companys financial statements have been prepared with these two apartment communities results of operations and the gain from
sale isolated and shown as discontinued operations.



Financing Activities



For the year
ended December 31, 2003, our net cash used in financing activities was $33.8 million compared to $17.6 million for the same period in 2002. In 2003, our financing activities related to mortgage financings, payment of distributions and payment of our
principal debt amortization.



The following is a summary of the
companys financing activities for the year ended December 31, 2003:



| |  |  | Entered into a $50 million secured revolving credit facility. The two-year secured credit facility is divided into two loans, a $40 million revolving credit facility and a $10
million swingline credit facility.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Financed $101.8 million in variable rate mortgage notes.
| | - |  | --------------------------------------------------------



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| |  |  | Paid $2.7 million in deferred financing costs associated with the above $151.8 million financings.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Repaid and terminated the $85 million unsecured line of credit using proceeds from the above financings.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Repaid $23.3 million in variable and fixed rate mortgage notes using proceeds from the above financings.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Paid scheduled debt maturities in the amount of $4.2 million.
| | - |  | -------------------------------------------------------------



| |  |  | Issued $5.4 million of shares through the dividend reinvestment plan.
| | - |  | ---------------------------------------------------------------------



| |  |  | Paid distributions in the amount of $47.3 million to common and preferred shareholders and operating partnership unit holders.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Repurchased $0.2 million in common shares.
| | - |  | ------------------------------------------



In September 2000, the Board of Directors authorized the repurchase of up to an additional $50 million of the companys common shares. Under this
authorization, the company has, as of December 31, 2003, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of $21.3 million. For the year ended December 31, 2003, the company repurchased 26,550 common
shares at an average price of $7.17 per share for a total cost of $0.2 million.



At the request of various lenders, some of the companys financings were provided to new wholly-owned subsidiaries of the company, which were formed for the special purpose of receiving the financing proceeds and
holding the mortgaged apartment communities. The company continues to manage the apartment communities. All of these financings are reflected on the audited consolidated financial statements of the company.



Capital Requirements



The company has an ongoing capital expenditure plan to fund its renovation
program for its apartment communities. Capital expenditures include capital replacements, initial capital expenditures, and redevelopment enhancements. The company anticipates funding these cash requirements as needed from a variety of sources
including equity raised from its dividend reinvestment plan and debt provided by its lines of credit.



Capital resources are expected to grow with the future sale of the companys shares and from cash flows from operations. Approximately 12.0% of all
2003 common stock distributions, or $5.4 million, was reinvested in additional common shares. In general, the companys liquidity and capital resources are believed to be sufficient to meet its cash requirements during 2004.



The company is operated as, and annually elects to be taxed as, a real estate
investment trust under the Internal Revenue Code. As a result, the company has no provision for federal income taxes, and thus there is no effect on the companys liquidity from federal income taxes. The company created a C-corporation which
elected the taxable REIT subsidiary (TRS) status for financing purposes for one apartment community. The TRS is subject to federal, state and local income taxes. For the year ended December 31, 2003, the impact of this TRSs income
taxes and related tax attributes were not material to the accompanying consolidated financial statements.



Contractual Obligations and Commitments



The table below sets forth a summary of our contractual obligations and commitments that will impact our future liquidity (in thousands):



|               |  |      |        |      |   |         |  |      |         |      |   |            |  |       |        |  |   |         |  |   |          
|-------------- |  | ---- | ------ | ---- | - | ------- |  | ---- | ------- | ---- | - | ---------- |  | ----- | ------ |  | - | ------- |  | - | ---------
|               |  | 2004 |        | 2005 |   | 2006    |  | 2007 |         | 2008 |   | Thereafter |  | Total
|Interest       |  | $    | 48,021 |      | $ | 43,799  |  | $    | 40,635  |      | $ | 35,033     |  | $     | 34,093 |  | $ | 109,973 |  | $ | 311,554  
|Mortgages      |  |      | 31,829 |      |   | 131,411 |  |      | 96,731  |      |   | 14,794     |  |       | 56,646 |  |   | 451,958 |  |   | 783,369  
|Capital leases |  |      | 291    |      |   | 306     |  |      | 304     |      |   | 197        |  |       | 60     |  |   | 44      |  |   | 1,202    
|               |  |      |        |      |   |         |  |      |         |      |   |            |  |       |        |  |   |         |  |   |          
|               |  | $    | 80,141 |      | $ | 175,516 |  | $    | 137,670 |      | $ | 50,024     |  | $     | 90,799 |  | $ | 561,975 |  | $ | 1,096,125
|               |  |      |        |      |   |         |  |      |         |      |   |            |  |       |        |  |   |         |  |   |          



The company
anticipates two development projects to be completed during 2005 and the costs associated with the developments to be funded through advances on the projects construction loans.



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Operating Partnership



Effective October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company
(collectively, the Limited Partners), and the company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the Limited Partnership). The company has approximately
an 84% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange
for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a portion of the preferred operating partnership units. If the Limited Partners make the election, the
company, at its option, will convert the preferred operating partnership units into either common shares of the company on a one-for-one basis or cash in an amount per unit equal to the closing price of a common share of the company on the exercise
date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.



During the first quarter of 2003, a total of 887,125 preferred operating partnership units were converted into common shares on a one-to-one basis. During
2003, the remaining 319,715 non-preferred operating partnership units converted to preferred operating partnership units as certain lease-up and stabilization criteria were met. As of December 31, 2003, there were 1,807,145 preferred operating
partnership units eligible for conversion into common shares on a one-for-one basis or cash, at the companys option.



Critical Accounting Policies



The consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require us to make estimates and
assumptions. We believe that the following critical accounting policies, among others, involve our more significant judgments and estimates used in the preparation of our financial statements.



Capital Expenditures



The company capitalized expenditures related to acquiring new assets,
materially enhancing the value of an existing asset or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing asset in ordinary operating condition, such as repairs and maintenance, are expensed
as incurred.



The company capitalizes interest, real estate
taxes, insurance and certain internal development and related overhead costs directly to the apartment community under development. Interest is capitalized to development projects based upon the weighted average cumulative project costs for each
period multiplied by the companys borrowing costs on its line of credit, expressed as a percentage. The internal development and related overhead costs are capitalized to the development projects based upon the effort identifiable with such
projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as real estate under development. The company ceases the capitalization of such costs as the
apartment homes become substantially complete and available for occupancy.



The company capitalized $16.4 million of improvements to its various apartment communities during 2003. The asset preservation capital expenditures, including floor coverings, HVAC equipment, roofs, appliances,
siding, exterior painting, parking lots, and other non-revenue enhancing capital expenditures totaled $9.7 million. Revenue enhancing capital expenditures, including interior upgrades, gating and access systems totaled $4.7 million for 2003.
Redevelopment expenditures, including amenities that add a material new feature or revenue source at our acquired apartment communities, totaled $2.0 million. The company capitalized costs of $0.7 million in development costs for 2003. The
companys total non-real estate capital additions, such as computer software, computer equipment, furniture and fixtures and property improvements to the companys management offices and its corporate offices, was approximately $1.3
million and is reflected on the balance sheet in the other asset category.



The company is also required by various lenders to fund a replacement reserve in advance for capital improvements.



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The companys capital improvement budget is reviewed continually and adjustments will be made if
deemed necessary.



Real Estate AssetsImpairment
Assessment



We periodically assess our real estate
assets for possible permanent impairment when certain events or changes in circumstances indicate that the carrying amount of real estate may not be recoverable. Management considers current market conditions and tenant credit analysis in
determining whether the recoverability of the carrying amount of an asset should be assessed. When an assessment is warranted, management determines if it is probable that the sum of the expected undiscounted future cash flows over the expected
holding period is less than the carrying amount of the property being assessed. If the undiscounted future cash flows are less than the carrying amount, then an impairment loss would be recognized equal to the amount of the difference between the
fair value of the property and its carrying amount. No impairment losses have been recorded to date.



Real Estate AssetsAllocation of Purchase Price



The company accounts for acquisitions utilizing the purchase method, and accordingly, the results of the acquisition
properties are included in the companys results of operations from the date of acquisition. The company allocates the purchase price to the acquired tangibles, consisting of land, building and improvements, and if material, identified
intangible assets and liabilities of above/below market leases and at-market leases in place based on their fair values. Allocation of fair value to real estate assets were based on internal management estimates on a property by property basis using
discounted cash flows using market capitalization rates. All liabilities with maturities in excess of one year assumed in connection with an acquisition is marked to market at the date of the acquisition using a market interest rate in effect at
that date for similar debt agreements with similar maturities. The resulting premium or discount is amortized into interest expense over the life of the related debt agreement using the effective interest method. Determinations of fair values used
in purchase price allocation are by their nature subjective and may have a significant impact on reported asset and liability balances in the consolidated balance sheets and in the reported amounts of depreciation expense and interest expense in the
consolidated statements of operations.



Rental Revenue
and Related Cost Recognition



Rental income and other
income are recorded on an accrual basis. Rental concessions and direct lease costs associated with lease origination are amortized on a straight-line basis over the terms of the respective leases. The companys apartment communities are leased
under lease agreements that, typically, have terms that do not exceed one year. Deferred rental concessions and direct lease costs were $2.0 million and $2.2 million at December 31, 2003 and 2002, respectively.



Recent Accounting Pronouncements



In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. (FIN 46) which was revised in December 2003, and is effective immediately for all transactions entered into with variable interest entities before February 2003. The provisions of FIN 46 must be applied
to all remaining entities subject to the Interpretation from the beginning of the first quarter of 2004. This statement defines the identification process of variable interest entities and how an entity assesses its interest in a variable interest
entity to decide whether to consolidate that entity. The company has formed wholly-owned subsidiaries for financing purposes and such financing is reflected in the consolidated financial statements. Currently, the company does not anticipate this
Statement having a material impact on its consolidated financial statements.



At the July 31, 2003 Emerging Issues Task Force meeting, the SEC Observer clarified the application of Topic D-42 related to preferred stock issuance costs. According to the clarification, all preferred stock issuance
costs, regardless of where in the stockholders equity section the costs were initially recorded, should be charged to income available to common shareholders for the purpose of calculating earnings per share at the time the



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preferred stock is redeemed. The SEC Observer indicated that preferred stock issuance costs not previously charged to income available to common shareholders
should be reflected retroactively in financial statements for reporting periods ending after September 15, 2003 by restating the financial statements of prior periods on an as filed basis. We have included these costs in determination of the excess
of consideration paid over book value to preferred shareholders in our 2001 consolidated statement of operations, therefore, no adjustment was required.



Market Risk Disclosure



The company is subject to changes in the fair market value of its fixed rate secured debt amounting to $597.4 million at December 31, 2003. If market
interest rates for fixed rate debt were 100 basis points higher at December 31, 2003, the fair value of fixed rate debt would decrease by $22.3 million to $575.1 million. If market interest rates for fixed rate debt were 100 basis points lower at
December 31, 2003, the fair value of fixed rate debt would have increased from $597.4 million to $656.6 million.



The company has market risk exposure to short-term interest rates from variable rate borrowings under its existing secured line of credit and variable
rate secured debt. The existing secured lines of credit bears interest at LIBOR plus 1.575%. The company may utilize variable rate debt up to specified limits to total market capitalization. The company has analyzed its interest rate risk exposure.
If market interest rates for these types of credit facilities average 100 basis points more in 2004 than they did in 2003, and the companys secured lines of credit were at the maximum of $50 million, and the variable rate secured debt remained
at $172.4 million, the companys interest expense would increase, and net income would decrease by $2.2 million. These amounts are determined by considering the impact of hypothetical interest rates on the companys borrowing cost. These
analyses do not consider the effects of the reduced overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the
change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the companys financial structure.



Impact of Inflation



Substantially all of our leases are for a term of one year or less, which
enables us to realize increased rents upon renewal of existing leases or the beginning of new leases. The short-term nature of these leases generally serves to reduce our risk of the adverse inflation. Short-term leases and relatively consistent
demand allow rents, and therefore cash flow from the portfolio, to provide an attractive hedge again inflation.



|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk
|-------- |  | ----------------------------------------------------------



Information required by this item is included in Item 7. See Managements Discussion and Analysis of Financial
Condition and Results of Operations of this Report, which is hereby incorporated into this item by reference.



|Item 8. |  | Financial Statements and Supplementary Data
|------- |  | -------------------------------------------



The financial statements of the company and report of independent auditors required to be included in this item are set forth in Item 15 of this report
and are hereby incorporated into this item by reference.



|Item 9. |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- |  | ------------------------------------------------------------------------------------



None.



|Item 9A. |  | Controls and Procedures
|-------- |  | -----------------------



Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the companys disclosure
controls and procedures as of the end of the period covered by this



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report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the companys disclosure controls
and procedures are effective and that there have been no changes in the companys internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the companys internal control over financial reporting. Since that evaluation process was completed, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.



PART III



|Item 10. |  | Directors and Executive Officers of the Registrant
|-------- |  | --------------------------------------------------



For information with respect to the companys directors and director nominees see the information under Ownership
of Equity Securities and Election of Directors in the companys Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference. For information with respect to the
companys executive officers see Executive Officers in the companys Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 11. |  | Executive Compensation
|-------- |  | ----------------------



For information with respect to compensation of the companys executive officers and directors, see the information under Compensation of
Executive Officers and Compensation of Directors in the companys Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- |  | ----------------------------------------------------------------------------------------------



See the information under Ownership of Equity Securities in the
companys Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 13. |  | Certain Relationships and Related Transactions
|-------- |  | ----------------------------------------------



For information on certain relationships and related transactions, see the information under Certain Relationships and Agreements in the
companys Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 14. |  | Principal Accountant Fees and Services
|-------- |  | --------------------------------------



For information with respect to certain principal accountant fees and services, see the information under the caption Independent Public
Accountants in the companys Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



For information with respect to the pre-approval policies for audit and non-audit services, see the information under the
same caption in the companys Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



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PART IV



|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K
|-------- |  | ----------------------------------------------------------------



|(a) |  | The following documents are filed as part of this Report
|--- |  | --------------------------------------------------------



| | 1. |  | Financial Statements.
| | -- |  | ---------------------



See Index to Consolidated Financial Statements and Schedule on page 34 of this Report.



| | 2. |  | Financial Statement Schedule.
| | -- |  | -----------------------------



See Index to Consolidated Financial Statements and Schedule on page 34 of this Report. All other schedules are omitted because they are not
required, are inapplicable, or the required information is included in the financial statements or notes thereto.



| | 3. |  | Exhibits
| | -- |  | --------



Incorporated herein by reference are the exhibits listed under Exhibit Index on page 62 of this report.



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



During the last quarter of 2003, the company filed the following current reports with the Securities and Exchange Commission:



Current Report on Form 8-K dated November 5, 2003, filed with the Securities
and Exchange Commission on November 6, 2003, under Item 12.



Current Report on Form 8-K dated October 1, 2003, filed with the Securities and Exchange Commission on October 3, 2003, under Item 5.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                                      |  |                                                                                                                            |  |  |  |  |  |               
|------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | --------------
|CORNERSTONE REALTY INCOME TRUST, INC. |  |                                                                                                                           
|                                      |  |                                                                                                                            |  | 
|By:                                   |  | /s/    GLADE M.
KNIGHT                                                                                                     |  |  |  |  |  | March 12, 2004
|                                      |  | Glade M. Knight                                                                                                            |  |  |  |  |  |               
|                                      |  |                                                                                                                            |  | 
|                                      |  | Chairman of the Board and Chief Executive Officer                                                                          |  |  |  |  |  |               
|                                      |  |                                                                                                                            |  | 
|By:                                   |  | /s/    STANLEY J. OLANDER, JR.                                                                                             |  |  |  |  |  | March 12, 2004
|                                      |  | Stanley J. Olander, Jr.                                                                                                    |  |  |  |  |  |               
|                                      |  |                                                                                                                            |  | 
|                                      |  | President and Chief Financial Officer (in such capacity, the principal financial officer and principal accounting
officer) |  |  |  |  |  |               



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.



|                                                      |  |                                                             |  |               
|----------------------------------------------------- |  | ----------------------------------------------------------- |  | --------------
|Signature                                             |  | Capacities                                                  |  | Date          
|                                                      |  |                                                            
|/s/    GLADE M.
KNIGHTGlade M.
Knight                 |  | Director, Chairman of the Board and Chief Executive Officer |  | March 12, 2004
|                                                      |  |                                                            
|/s/    STANLEY J. OLANDER,
JR.Stanley J. Olander,
Jr. |  | Director, President and Chief Financial Officer             |  | March 12, 2004
|                                                      |  |                                                            
|/s/    GLENN W. BUNTING,
JR.Glenn W. Bunting,
Jr.     |  | Director                                                    |  | March 12, 2004
|                                                      |  |                                                            
|/s/    KENT W.
COLTONKent W.
Colton                   |  | Director                                                    |  | March 12, 2004
|                                                      |  |                                                            
|/s/    LESLIE A.
GRANDISLeslie A.
Grandis             |  | Director                                                    |  | March 12, 2004
|                                                      |  |                                                            
|Penelope W. Kyle                                      |  | Director                                                    |  | March 12, 2004
|                                                      |  |                                                            
|/s/    HARRY S.
TAUBENFELDHarry S.
Taubenfeld         |  | Director                                                    |  | March 12, 2004
|                                                      |  |                                                            
|/s/    MARTIN
ZUCKERBRODMartin
Zuckerbrod             |  | Director                                                    |  | March 12, 2004
|                                                      |  |                                                            
|/s/    W. TENNENT
HOUSTONW. Tennent
Houston           |  | Director                                                    |  | March 12, 2004
|                                                      |  |                                                            
|/s/    ROBERT A. GARY
IVRobert A Gary IV              |  | Director                                                    |  | March 12, 2004



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CORNERSTONE REALTY INCOME TRUST, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE



|                                                                                             |  |     
|-------------------------------------------------------------------------------------------- |  | ----
|                                                                                             |  | Page
|                                                                                             | 
|Independent Auditors ReportErnst & Young LLP                                               |  | 35  
|                                                                                             | 
|Consolidated Balance Sheets As of December 31, 2003 and 2002                                 |  | 36  
|                                                                                             | 
|Consolidated Statements of OperationsYears ended December 31, 2003, 2002 and 2001           |  | 37  
|                                                                                             | 
|Consolidated Statements of Shareholders EquityYears ended December 31, 2003, 2002 and 2001 |  | 38  
|                                                                                             | 
|Consolidated Statements of Cash FlowsYears ended December 31, 2003, 2002 and 2001           |  | 39  
|                                                                                             | 
|Notes to Consolidated Financial Statements                                                   |  | 40  
|                                                                                             | 
|Financial Statement Schedule                                                                 |  |     
|                                                                                             | 
|Schedule IIIReal Estate and Accumulated Depreciation                                        |  | 54  



All other financial
statement schedules have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial statements or notes thereto.



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INDEPENDENT AUDITORS REPORT



The Board of Directors and Shareholders

Cornerstone Realty Income Trust, Inc.



We have audited
the accompanying consolidated balance sheets of Cornerstone Realty Income Trust, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Cornerstone Realty Income Trust, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.



/S/  ERNST & YOUNG LLP



Richmond, Virginia

February 10, 2004





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CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                  |  | December 31,                           |          
|                                                                                                                                                                  |  | 2003                                   |           |   | 2002 |  
|                                                                                                                                                                  |  | (In thousands, except pershare dollar) |          
|ASSETS                                                                                                                                                            |  |                                        |           |   |      |   |           |  
|Investment in rental property:                                                                                                                                    |  |                                        |           |   |      |   |           |  
|Land                                                                                                                                                              |  | $                                      | 160,192   |   |      | $ | 149,133   |  
|Buildings and property improvements                                                                                                                               |  |                                        | 1,103,043 |   |      |   | 960,735   |  
|Furniture and fixtures and other                                                                                                                                  |  |                                        | 38,735    |   |      |   | 34,139    |  
|Real estate under development                                                                                                                                     |  |                                        | 5,450     |   |      |   | 1,635     |  
|Assets available for sale, net                                                                                                                                    |  |                                        |          |   |      |   | 13,185    |  
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|                                                                                                                                                                  |  |                                        | 1,307,420 |   |      |   | 1,158,827 |  
|Less accumulated depreciation                                                                                                                                     |  |                                        | (224,535  | ) |      |   | (172,978  | )
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|                                                                                                                                                                  |  |                                        | 1,082,885 |   |      |   | 985,849   |  
|                                                                                                                                                                  |  |                                       
|Cash and cash equivalents                                                                                                                                         |  |                                        | 1,393     |   |      |   | 1,380     |  
|Prepaid expenses                                                                                                                                                  |  |                                        | 5,334     |   |      |   | 4,636     |  
|Deferred financing costs, net                                                                                                                                     |  |                                        | 5,924     |   |      |   | 4,519     |  
|Investment in real estate joint ventures                                                                                                                          |  |                                        | 2,649     |   |      |   |          |  
|Other assets                                                                                                                                                      |  |                                        | 26,257    |   |      |   | 18,463    |  
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|Total Assets                                                                                                                                                      |  | $                                      | 1,124,442 |   |      | $ | 1,014,847 |  
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|LIABILITIES and SHAREHOLDERS' EQUITY                                                                                                                              |  |                                        |           |   |      |   |           |  
|Liabilities                                                                                                                                                       |  |                                        |           |   |      |   |           |  
|Notes payable-unsecured                                                                                                                                           |  | $                                      |          |   |      | $ | 77,913    |  
|Notes payable-secured                                                                                                                                             |  |                                        | 801,754   |   |      |   | 604,446   |  
|Distributions payable                                                                                                                                             |  |                                        | 76        |   |      |   | 76        |  
|Accounts payable and accrued expenses                                                                                                                             |  |                                        | 14,950    |   |      |   | 12,953    |  
|Rents received in advance                                                                                                                                         |  |                                        | 884       |   |      |   | 606       |  
|Tenant security deposits                                                                                                                                          |  |                                        | 1,889     |   |      |   | 1,574     |  
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|Total Liabilities                                                                                                                                                 |  |                                        | 819,553   |   |      |   | 697,568   |  
|Minority interest of unit holders in operating partnership                                                                                                        |  |                                        | 18,884    |   |      |   | 30,205    |  
|                                                                                                                                                                  |  |                                       
|Shareholders equity                                                                                                                                              |  |                                        |           |   |      |   |           |  
|Preferred stock, no par value, authorized 25,000 shares; 127 shares $25 liquidation preference, Series A Cumulative Convertible Redeemable
issued and outstanding |  |                                        | 2,680     |   |      |   | 2,680     |  
|Common stock, no par value, authorized 100,000 shares; issued and outstanding 48,361 shares and 55,534 shares, respectively                                       |  |                                        | 538,969   |   |      |   | 487,303   |  
|Deferred compensation                                                                                                                                             |  |                                        | (456      | ) |      |   | (638      | )
|Distributions greater than net income                                                                                                                             |  |                                        | (255,188  | ) |      |   | (202,271  | )
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|Total Shareholders Equity                                                                                                                                        |  |                                        | 286,005   |   |      |   | 287,074   |  
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  
|Total Liabilities and Shareholders' Equity                                                                                                                        |  | $                                      | 1,124,442 |   |      | $ | 1,014,847 |  
|                                                                                                                                                                  |  |                                        |           |   |      |   |           |  





See accompanying notes to consolidated financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                           |  | Years Ended December 31,              |        
|                                                                                                           |  | 2003                                  |         |   | 2002 |   |         | 2001 | 
|                                                                                                           |  | (In thousands, except per share data) |        
|REVENUE:                                                                                                   |  |                                       |         |   |      |   |         |      |  |   |         |  
|Rental income                                                                                              |  | $                                     | 163,059 |   |      | $ | 153,295 |      |  | $ | 142,353 |  
|Other property income                                                                                      |  |                                       | 8,593   |   |      |   | 6,571   |      |  |   | 7,360   |  
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                                                             |  |                                       | 171,652 |   |      |   | 159,866 |      |  |   | 149,713 |  
|EXPENSES:                                                                                                  |  |                                       |         |   |      |   |         |      |  |   |         |  
|Property and maintenance                                                                                   |  |                                       | 50,930  |   |      |   | 44,907  |      |  |   | 38,716  |  
|Taxes and insurance                                                                                        |  |                                       | 23,550  |   |      |   | 20,727  |      |  |   | 17,861  |  
|Property management                                                                                        |  |                                       | 4,102   |   |      |   | 3,798   |      |  |   | 3,049   |  
|General and administrative                                                                                 |  |                                       | 3,824   |   |      |   | 3,904   |      |  |   | 3,309   |  
|Depreciation and amortization of real estate assets                                                        |  |                                       | 52,794  |   |      |   | 45,157  |      |  |   | 39,093  |  
|Other depreciation                                                                                         |  |                                       | 23      |   |      |   | 24      |      |  |   | 26      |  
|Other                                                                                                      |  |                                       | 239     |   |      |   | 251     |      |  |   | 87      |  
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Total expenses                                                                                             |  |                                       | 135,462 |   |      |   | 118,768 |      |  |   | 102,141 |  
|Income before interest income (expense)                                                                    |  |                                       | 36,190  |   |      |   | 41,098  |      |  |   | 47,572  |  
|Interest income                                                                                            |  |                                       | 274     |   |      |   | 31      |      |  |   | 497     |  
|Interest expense                                                                                           |  |                                       | (45,896 | ) |      |   | (41,684 | )    |  |   | (30,952 | )
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Income before gains on sales of investments and minority interest of unit holders in operating partnership |  |                                       | (9,432  | ) |      |   | (555    | )    |  |   | 17,117  |  
|Minority interest of unit holders in operating partnership                                                 |  |                                       | 262     |   |      |   | 36      |      |  |   | (7      | )
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net (loss) income from continuing operations                                                               |  |                                       | (9,170  | ) |      |   | (519    | )    |  |   | 17,110  |  
|Discontinued operations                                                                                    |  |                                       |         |   |      |   |         |      |  |   |         |  
|(Loss) income from discontinued operations                                                                 |  |                                       | (15     | ) |      |   | 739     |      |  |   | 880     |  
|Gain on sales of investments                                                                               |  |                                       | 1,887   |   |      |   |        |      |  |   |        |  
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                                                          |  |                                       | (7,298  | ) |      |   | 220     |      |  |   | 17,990  |  
|Distributions to preferred shareholders                                                                    |  |                                       | (303    | ) |      |   | (303    | )    |  |   | (7,698  | )
|Excess consideration paid over book value to preferred shareholders                                        |  |                                       |        |   |      |   |        |      |  |   | (27,492 | )
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net loss available to common shareholders                                                                  |  | $                                     | (7,601  | ) |      | $ | (83     | )    |  | $ | (17,200 | )
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net loss per common share-basic and diluted from continuing operations                                     |  | $                                     | (0.18   | ) |      | $ | (0.02   | )    |  | $ | (0.42   | )
|Net income per common share-basic and diluted from discontinued operations                                 |  | $                                     | 0.04    |   |      | $ | 0.02    |      |  | $ | 0.02    |  
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  
|Net (loss) income per common share-basic and diluted                                                       |  | $                                     | (0.14   | ) |      | $ |        |      |  | $ | (0.40   | )
|                                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |  



See accompanying notes
to consolidated financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                                                                        |  |                                       |   |  |                 |         |   |                      |         |   |                                        |   |          |                           |  |   |      |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | - |  | --------------- | ------- | - | -------------------- | ------- | - | -------------------------------------- | - | -------- | ------------------------- |  | - | ---- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                        |  | Common Stock                          |   |  | Preferred Stock |         |   | DeferredCompensation |         |   | Distributions(Greater) Than Net Income |   |          | Total Shareholders'Equity | 
|                                                                                                        |  | Number ofShares                       |   |  | Amount          |         |   | Number ofShares      |         |   | Amount                                 |   |          |                           | 
|                                                                                                        |  | (In thousands, except per share data) |  
|                                                                                                        |  |                                       |   |  |                 |         |  
|Balance at December 31, 2000                                                                            |  | 34,926                                |   |  | $               | 342,455 |   |                      | 12,627  |   |                                        | $ | 265,194  |                           |  | $ | (47  | ) |  | $ | (85,600  | ) |  | $ | 522,002  |  
|                                                                                                        |  |                                       |   |  |                 |         |  
|Net income                                                                                              |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | 17,990   |   |  |   | 17,990   |  
|Cash distributions declared to common shareholders ($1.12 per share)                                    |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (45,905  | ) |  |   | (45,905  | )
|Cash distributions for Series A Convertible Preferred Shares                                            |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (7,317   | ) |  |   | (7,317   | )
|Imputed distributions on Series A Convertible Preferred Shares                                          |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   | 381      |                           |  |   |     |   |  |   | (381     | ) |  |   |         |  
|Exercise of stock options                                                                               |  | 172                                   |   |  |                 | 1,815   |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | 1,815    |  
|Purchase of common stock                                                                                |  | (1,356                                | ) |  |                 | (14,710 | ) |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | (14,710  | )
|Preferred stock converted to common stock                                                               |  | 30                                    |   |  |                 | 479     |   |                      | (19     | ) |                                        |   | (479     | )                         |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of common shares through conversion of Series A Convertible Preferred Shares into common stock |  | 13,222                                |   |  |                 | 143,325 |   |                      | (12,480 | ) |                                        |   | (262,401 | )                         |  |   |     |   |  |   |         |   |  |   | (119,076 | )
|Excess consideration paid over book value for preferred stock redemption                                |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (27,492  | ) |  |   | (27,492  | )
|Restricted stock grants                                                                                 |  | 65                                    |   |  |                 | 697     |   |                      |        |   |                                        |   |         |                           |  |   | (697 | ) |  |   |         |   |  |   |         |  
|Amortization of deferred compensation                                                                   |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   | 59   |   |  |   |         |   |  |   | 59       |  
|Shares issued through dividend reinvestment plan                                                        |  | 606                                   |   |  |                 | 6,468   |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | 6,468    |  
|                                                                                                        |  |                                       |   |  |                 |         |   |                      |         |   |                                        |   |          |                           |  |   |      |   |  |   |          |   |  |   |          |  
|                                                                                                        |  |                                       |   |  |                 |         |  
|Balance at December 31, 2001                                                                            |  | 47,665                                |   |  |                 | 480,529 |   |                      | 128     |   |                                        |   | 2,695    |                           |  |   | (685 | ) |  |   | (148,705 | ) |  |   | 333,834  |  
|                                                                                                        |  |                                       |   |  |                 |         |  
|Net income                                                                                              |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | 220      |   |  |   | 220      |  
|Cash distributions declared to common shareholders ($1.12 per share)                                    |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (53,482  | ) |  |   | (53,482  | )
|Cash distributions for Series A Convertible Preferred Stock                                             |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (304     | ) |  |   | (304     | )
|Exercise of stock options                                                                               |  | 18                                    |   |  |                 | 179     |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | 179      |  
|Purchase of common stock                                                                                |  | (36                                   | ) |  |                 | (367    | ) |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | (367     | )
|Preferred stock converted to common stock                                                               |  | 1                                     |   |  |                 | 15      |   |                      | (1      | ) |                                        |   | (15      | )                         |  |   |     |   |  |   |         |   |  |   |         |  
|Restricted stock grants                                                                                 |  | 17                                    |   |  |                 | 190     |   |                      |        |   |                                        |   |         |                           |  |   | (190 | ) |  |   |         |   |  |   |         |  
|Amortization of deferred compensation                                                                   |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   | 237  |   |  |   |         |   |  |   | 237      |  
|Shares issued through dividend reinvestment plan                                                        |  | 696                                   |   |  |                 | 6,757   |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | 6,757    |  
|                                                                                                        |  |                                       |   |  |                 |         |   |                      |         |   |                                        |   |          |                           |  |   |      |   |  |   |          |   |  |   |          |  
|                                                                                                        |  |                                       |   |  |                 |         |  
|Balance at December 31, 2002                                                                            |  | 48,361                                |   |  |                 | 487,303 |   |                      | 127     |   |                                        |   | 2,680    |                           |  |   | (638 | ) |  |   | (202,271 | ) |  |   | 287,074  |  
|                                                                                                        |  |                                       |   |  |                 |         |  
|Net loss                                                                                                |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (7,298   | ) |  |   | (7,298   | )
|Cash distributions declared to common shareholders ($.88 per share)                                     |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (45,316  | ) |  |   | (45,316  | )
|Cash distributions for Series A Convertible Preferred Shares                                            |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   | (303     | ) |  |   | (303     | )
|Purchase of common stock                                                                                |  | (26                                   | ) |  |                 | (190    | ) |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | (190     | )
|Issuance of common shares in connection with the acquisition of Merry Land Properties, Inc.             |  | 4,993                                 |   |  |                 | 36,147  |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | 36,147   |  
|Issuance of Series B Convertible Preferred Shares                                                       |  |                                      |   |  |                 |        |   |                      | 605     |   |                                        |   | 3,922    |                           |  |   |     |   |  |   |         |   |  |   | 3,922    |  
|Issuance of common shares through conversion of Series B Convertible Preferred Shares                   |  | 605                                   |   |  |                 | 3,922   |   |                      | (605    | ) |                                        |   | (3,922   | )                         |  |   |     |   |  |   |         |   |  |   |         |  
|Conversion of minority interest of unit holders in operating partnership                                |  | 887                                   |   |  |                 | 6,326   |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | 6,326    |  
|Restricted stock grants                                                                                 |  | 4                                     |   |  |                 | 33      |   |                      |        |   |                                        |   |         |                           |  |   | (33  | ) |  |   |         |   |  |   |         |  
|Amortization of deferred compensation                                                                   |  |                                      |   |  |                 |        |   |                      |        |   |                                        |   |         |                           |  |   | 215  |   |  |   |         |   |  |   | 215      |  
|Shares issued through dividend reinvestment plan                                                        |  | 710                                   |   |  |                 | 5,428   |   |                      |        |   |                                        |   |         |                           |  |   |     |   |  |   |         |   |  |   | 5,428    |  
|                                                                                                        |  |                                       |   |  |                 |         |   |                      |         |   |                                        |   |          |                           |  |   |      |   |  |   |          |   |  |   |          |  
|                                                                                                        |  |                                       |   |  |                 |         |  
|Balance at December 31, 2003                                                                            |  | 55,534                                |   |  | $               | 538,969 |   |                      | 127     |   |                                        | $ | 2,680    |                           |  | $ | (456 | ) |  | $ | (255,188 | ) |  | $ | 286,005  |  
|                                                                                                        |  |                                       |   |  |                 |         |   |                      |         |   |                                        |   |          |                           |  |   |      |   |  |   |          |   |  |   |          |  



See accompanying notes
to consolidated financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                           |  |                          |         |   |      |   |         |      |  |   |          |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                           |  | Years Ended December 31, |        
|                                                                                                           |  | 2003                     |         |   | 2002 |   |         | 2001 | 
|                                                                                                           |  | (In thousands)           |        
|Cash flow from operating activities:                                                                       |  |                          |         |   |      |   |         |      |  |   |          |  
|Net (loss) income                                                                                          |  | $                        | (7,298  | ) |      | $ | 220     |      |  | $ | 17,990   |  
|Adjustments to reconcile net income to net cash provided by operating activities                           |  |                          |         |   |      |   |         |      |  |   |          |  
|Gain on sales of rental property                                                                           |  |                          | (1,887  | ) |      |   |        |      |  |   |         |  
|Depreciation and amortization                                                                              |  |                          | 52,956  |   |      |   | 46,045  |      |  |   | 40,025   |  
|Minority interest of unit holders in operating partnership                                                 |  |                          | (262    | ) |      |   | (36     | )    |  |   | 7        |  
|Amortization of deferred compensation                                                                      |  |                          | 182     |   |      |   | 237     |      |  |   | 59       |  
|Amortization of deferred financing costs                                                                   |  |                          | 1,320   |   |      |   | 835     |      |  |   | 735      |  
|Amortization of mortgage notes payable premium                                                             |  |                          | (2,161  | ) |      |   | (357    | )    |  |   | (258     | )
|Changes in operating assets and liabilities:                                                               |  |                          |         |   |      |   |         |      |  |   |          |  
|Operating assets                                                                                           |  |                          | (1,229  | ) |      |   | 888     |      |  |   | (8,376   | )
|Operating liabilities                                                                                      |  |                          | 57      |   |      |   | (1,017  | )    |  |   | 1,654    |  
|                                                                                                           |  |                          |         |   |      |   |         |      |  |   |          |  
|Net cash provided by operating activities                                                                  |  |                          | 41,678  |   |      |   | 46,815  |      |  |   | 51,836   |  
|Cash flow from investing activities:                                                                       |  |                          |         |   |      |   |         |      |  |   |          |  
|Acquisitions of rental property, net of debt assumed                                                       |  |                          | (4,129  | ) |      |   | (20,100 | )    |  |   | (58,471  | )
|Development of real estate assets                                                                          |  |                          | (737    | ) |      |   | (1,272  | )    |  |   | (1,618   | )
|Major renovations                                                                                          |  |                          | (2,732  | ) |      |   | (3,868  | )    |  |   | (2,422   | )
|Capital improvements                                                                                       |  |                          | (13,691 | ) |      |   | (12,215 | )    |  |   | (17,060  | )
|Net funding of real estate reserve for replacement                                                         |  |                          | (1,613  | ) |      |   | 984     |      |  |   | (1,010   | )
|Proceeds from sale of land                                                                                 |  |                          |        |   |      |   |        |      |  |   | 785      |  
|Net proceeds from the sale of rental property                                                              |  |                          | 15,018  |   |      |   |        |      |  |   |         |  
|                                                                                                           |  |                          |         |   |      |   |         |      |  |   |          |  
|Net cash used in investing activities                                                                      |  |                          | (7,884  | ) |      |   | (36,471 | )    |  |   | (79,796  | )
|Cash flow from financing activities:                                                                       |  |                          |         |   |      |   |         |      |  |   |          |  
|Proceeds (repayments) from/of short-term borrowings, net                                                   |  |                          | (77,913 | ) |      |   | 22,913  |      |  |   | 41,790   |  
|Proceeds (repayments) from/borrowings on secured line of credit, net                                       |  |                          | 13,604  |   |      |   |        |      |  |   |         |  
|Proceeds from secured notes payable                                                                        |  |                          | 102,883 |   |      |   | 12,600  |      |  |   | 206,920  |  
|Repayment of secured notes payable                                                                         |  |                          | (27,535 | ) |      |   | (3,397  | )    |  |   | (1,067   | )
|Payment of financing costs                                                                                 |  |                          | (2,726  | ) |      |   | (562    | )    |  |   | (1,924   | )
|Shares issued through dividend reinvestment plan and exercise of stock options                             |  |                          | 5,400   |   |      |   | 6,936   |      |  |   | 8,283    |  
|Purchase of common stock                                                                                   |  |                          | (190    | ) |      |   | (367    | )    |  |   | (14,710  | )
|Cash payment for conversion of Series A Convertible Preferred Shares into common stock                     |  |                          |        |   |      |   |        |      |  |   | (143,785 | )
|Payment of costs associated with the conversion of Series A Convertible Preferred Shares into common stock |  |                          |        |   |      |   |        |      |  |   | (2,783   | )
|Cash distributions to operating partnership unit holders                                                   |  |                          | (1,685  | ) |      |   | (1,957  | )    |  |   |         |  
|Cash distributions paid to preferred shareholders                                                          |  |                          | (303    | ) |      |   | (304    | )    |  |   | (14,344  | )
|Cash distributions paid to common shareholders                                                             |  |                          | (45,316 | ) |      |   | (53,482 | )    |  |   | (45,905  | )
|                                                                                                           |  |                          |         |   |      |   |         |      |  |   |          |  
|Net cash (used in) provided by financing activities                                                        |  |                          | (33,781 | ) |      |   | (17,620 | )    |  |   | 32,475   |  
|Increase (decrease) in cash and cash equivalents                                                           |  |                          | 13      |   |      |   | (7,276  | )    |  |   | 4,515    |  
|Cash and cash equivalents, beginning of year                                                               |  |                          | 1,380   |   |      |   | 8,656   |      |  |   | 4,141    |  
|                                                                                                           |  |                          |         |   |      |   |         |      |  |   |          |  
|Cash and cash equivalents, end of year                                                                     |  | $                        | 1,393   |   |      | $ | 1,380   |      |  | $ | 8,656    |  
|                                                                                                           |  |                          |         |   |      |   |         |      |  |   |          |  
|Supplemental information:                                                                                  |  |                          |         |   |      |   |         |      |  |   |          |  
|Cash paid for interest                                                                                     |  | $                        | 46,209  |   |      | $ | 40,714  |      |  | $ | 28,294   |  
|Non-cash transactions:                                                                                     |  |                          |         |   |      |   |         |      |  |   |          |  
|Acquisition                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Real estate assets acquired                                                                                |  |                          | 147,437 |   |      |   | 26,019  |      |  |   |         |  
|Assumption of mortgage notes                                                                               |  |                          | 90,568  |   |      |   | 16,000  |      |  |   | 103,123  |  
|Operating assets acquired                                                                                  |  |                          | 9,048   |   |      |   |        |      |  |   | 912      |  
|Operating liabilities acquired                                                                             |  |                          | 2,538   |   |      |   |        |      |  |   | 1,305    |  
|Fair value adjustment on mortgage notes                                                                    |  |                          | 19,950  |   |      |   |        |      |  |   | 458      |  
|Issuance of common stock                                                                                   |  |                          | 36,285  |   |      |   |        |      |  |   |         |  
|Issuance of preferred stock                                                                                |  |                          | 3,930   |   |      |   |        |      |  |   |         |  
|Issuance of operating partnership units                                                                    |  |                          |        |   |      |   | 10,019  |      |  |   | 22,179   |  
|Conversion of operating partnership unit into common stock                                                 |  |                          | 6,326   |   |      |   |        |      |  |   |         |  
|Issuance of common stock for preferred stock                                                               |  |                          |        |   |      |   |        |      |  |   | 143,325  |  
|Capital leases                                                                                             |  |                          | 118     |   |      |   | 1,148   |      |  |   |         |  



See accompanying notes
to consolidated financial statements.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1    General Information and Summary of Significant Accounting Policies



Business



Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, the company), a Virginia corporation, is
an owner-operator of one business segment consisting of residential apartment communities in the southern regions of the United States. As of December 31, 2003, the company, as a general partner, has approximately an 84% interest in Cornerstone NC
Operating Limited Partnership.



All significant intercompany
accounts and transactions have been eliminated in consolidation. The companys common stock trades on the New York Stock Exchange under the ticker symbol TCR.



Cash and Cash Equivalents



Cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents
approximates their carrying value.



Investment in Rental Property



The investment in rental property is recorded at cost,
net of depreciation. The company records impairment losses on rental property used in operations if indicators of impairment are present and the undiscounted cash flows estimated to be generated by the respective properties are less than their
carrying amount. Impairment losses are measured as the difference between the assets fair value less cost to sell, and its carrying value. No impairment losses have been recorded to date.



Repairs and maintenance costs are expensed as incurred while significant
improvements, renovations and replacements are capitalized. The company capitalizes expenditures related to acquiring new assets, materially enhancing the value of an existing asset or substantially extending the useful life of an existing asset.
The companys capital expenditures include floor coverings, HVAC equipment, roofs, appliances, siding, exterior painting, parking lots, interior upgrades, gating and access systems. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets which are 27.5 years for buildings, range from 10 to 27.5 years for major improvements and range from three to seven years for furniture and fixtures.



Development



Development projects and related carrying costs are capitalized. The costs of development projects include interest, real
estate taxes, insurance and certain internal development and related overhead costs directly related to the apartment community under development. Interest is capitalized to development projects based upon the weighted average cumulative project
costs for each period multiplied by the companys borrowing costs on its line of credit, expressed as a percentage. The internal development and related overhead costs are capitalized to the development projects based upon the effort
identifiable with such projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as real estate under development. The company ceases the capitalization of
such costs as the apartment homes become substantially complete and available for occupancy.



Income Recognition



Rental income, interest, and other income are recorded on an accrual basis. Rental concessions are recognized on a straight-line basis over the terms of the respective leases. The companys apartment communities are leased under lease
agreements that, typically, have terms that do not exceed one year. Deferred rental concessions were $1.0 million and $1.1 million at December 31, 2003 and 2002, respectively.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Deferred Financing and Lease Origination Costs



Deferred financing costs consist of loan fees and related expenses which are amortized on a straight-line basis that
approximates the effective interest method over the terms of the related notes. Accumulated amortization of deferred financing costs totaled $2.2 million and $1.8 million in 2003 and 2002, respectively.



The company defers direct costs incurred to originate a lease and amortizes
the costs over the life of the lease which on an average is one year. Deferred lease origination costs were $1.0 and $1.1 million at December 31, 2003 and 2002, respectively.



Stock Incentive Plans



The company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees (APB No. 25) and related Interpretations in accounting for its employee stock options. As discussed in Note 7, the alternative fair value accounting provided for under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) requires use of option valuation models that were not developed for use in valuing employee stock options.



Under APB No. 25, because the exercise price of the companys
employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.



The company granted 69,550, 57,612 and 52,395 options to purchase shares during the years ended December 31, 2003, 2002 and 2001, respectively. The
companys options to purchase shares are exercisable after six months after the date of grant, therefore the compensation expense would occur in the period granted. The following information about stock-based employee compensation costs
reconciles the difference of accounting for employee stock based compensation under the intrinsic value method of APB No. 25 and related interpretations and the fair value method prescribed under SFAS No. 123 (in thousands):



|                                                                                                          |  |      |        |   |      |   |      |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                                                                                          |  | 2003 |        |   | 2002 |   |      | 2001 | 
|Net (loss) income, as reported                                                                            |  | $    | (7,298 | ) |      | $ | 220  |      |  | $ | 17,990 |  
|Add:  Stock-basedemployee compensation expense included in reported net income                            |  |      | 215    |   |      |   | 237  |      |  |   | 59     |  
|Deduct:  Stock-basedemployee compensation expense determined under fair value based method for all awards |  |      | (219   | ) |      |   | (239 | )    |  |   | (60    | )
|                                                                                                          |  |      |        |   |      |   |      |      |  |   |        |  
|Pro forma net (loss) income as if the fair value method had been applied to all option grants             |  | $    | (7,302 | ) |      | $ | 218  |      |  | $ | 17,989 |  
|                                                                                                          |  |      |        |   |      |   |      |      |  |   |        |  
|Earnings per common share                                                                                 |  |      |        |   |      |   |      |      |  |   |        |  
|Basic-as reported                                                                                         |  | $    | (0.14  | ) |      | $ |     |      |  | $ | (0.40  | )
|Basic-pro forma                                                                                           |  | $    | (0.14  | ) |      | $ |     |      |  | $ | (0.40  | )
|Diluted-as reported                                                                                       |  | $    | (0.14  | ) |      | $ |     |      |  | $ | (0.40  | )
|Diluted-pro forma                                                                                         |  | $    | (0.14  | ) |      | $ |     |      |  | $ | (0.40  | )



Pro forma information
regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair
value method described in that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002, and 2001:



|                                       |  |      |   |  |      |   |  |      |  
|-------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                       |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Risk-free interest                     |  | 3.5  | % |  | 4.0  | % |  | 5.0  | %
|Dividend yields                        |  | 10.6 |   |  | 7.4  | % |  | 9.0  | %
|Volatility factors                     |  | 160  |   |  | 162  |   |  | 142  |  
|Weighted-average expected life (years) |  | 10   |   |  | 10   |   |  | 10   |  





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the companys employee stock
options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options.



Advertising Costs



Costs incurred for the production and distribution of advertising are expensed as incurred. Amounts expensed during 2003, 2002, and 2001 were $2.2 million, $2.0 million, and $1.8 million, respectively. These amounts are included in property
and maintenance expenses in the consolidated statements of operations.



Earnings Per Common Share



Basic and diluted
earnings per common share are calculated in accordance with FASB Statement No. 128 Earnings Per Share. Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted
earnings per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. The Series A Convertible Preferred Shares and operating partnership units are not included in dilutive
earnings per share calculations since the impact is not dilutive.



Minority
Interest in Operating Partnership



Interest in the
Cornerstone NC Operating Limited Partnership held by a limited partner is represented by operating partnership units (OP Units), as discussed in Note 6 below. The operating partnerships income is allocated to holders of OP Units
based upon net income available to common shareholders and the weighted average number of OP Units outstanding to weighted average common shares outstanding plus OP Units outstanding during the period. OP Units can be exchanged for cash or common
shares on a one-for-one basis, at the companys option. Capital contributions, distributions, and profits and losses are allocated to minority interests in accordance with the terms of the partnership agreement. OP Units as a percentage of
total OP Units and shares outstanding were 3.2% and 4.7% at December 31, 2003 and 2002, respectively.



Income Taxes



The
company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code of 1986, as amended (the Code). Generally, a real estate investment trust that complies with the provisions of the
Code and distributes at least 90% of its taxable income to its shareholders does not pay federal income taxes on its distributed income. Accordingly, no provision has been made for federal income taxes. The company is subject to various state,
local, excise and franchise taxes.



The company created a
C-corporation which elected the taxable REIT subsidiary (TRS) status for financing purposes for one apartment community. The TRS is subject to federal, state and local income taxes. For the year ended December 31, 2003, the impact of
this TRSs income taxes and related tax attributes were not material to the accompanying consolidated financial statements.



The differences between net income available to common shareholders for financial reporting purposes and taxable income before dividend deductions, as
well as differences between the tax basis and financial reporting basis of the companys assets, relate primarily to temporary differences, principally real estate depreciation, tax deferral of certain gain on property sales and tax free
mergers and acquisitions. The temporary differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For federal income tax purposes, distributions paid to common shareholders consist of ordinary
income, capital gains, return of capital or a combination thereof. For the three years ended December 31, 2003, distributions paid per common share were classified as follows (unaudited):



|                       |  |      |     |      |   |      |  |   |     
|---------------------- |  | ---- | --- | ---- | - | ---- |  | - | ----
|                       |  | 2003 |     | 2002 |   | 2001
|Ordinary income        |  | $    | .05 |      | $ | .33  |  | $ | .76 
|Long-term capital gain |  |      | .02 |      |   |     |  |   |    
|Return of capital      |  |      | .81 |      |   | .79  |  |   | .36 
|                       |  |      |     |      |   |      |  |   |     
|                       |  | $    | .88 |      | $ | 1.12 |  | $ | 1.12
|                       |  |      |     |      |   |      |  |   |     



In 2003, 2002 and
2001, of the total preferred distribution, 100% was taxable as ordinary income.



Use of Estimates



The preparation of financial
statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results
may differ from those estimates.



Comprehensive Income



On January 1, 1998, the company adopted SFAS No. 130, Reporting
Comprehensive Income. The company does not currently have any items of comprehensive income requiring separate reporting and disclosure.



Reclassification



Certain previously reported amounts have been reclassified to conform to the current year presentation.



Recent Accounting Pronouncements



In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. (FIN 46) which was revised in December 2003, and is effective immediately for all transactions entered into with variable interest entities before February 2003. The provisions of FIN 46 must be
applied to all remaining entities subject to the Interpretation from the beginning of the first quarter of 2004. This statement defines the identification process of variable interest entities and how an entity assesses its interest in a variable
interest entity to decide whether to consolidate that entity. The company has formed wholly-owned subsidiaries for financing purposes and such financing is reflected in the consolidated financial statements. Currently, the company does not
anticipate this Statement having a material impact on its consolidated financial statements.



At the July 31, 2003 Emerging Issues Task Force meeting, the SEC Observer clarified the application of Topic D-42 related to preferred stock issuance costs. According to the clarification, all preferred stock issuance
costs, regardless of where in the stockholders equity section the costs were initially recorded, should be charged to income available to common shareholders for the purpose of calculating earnings per share at the time the preferred stock is
redeemed. The SEC Observer indicated that preferred stock issuance costs not previously charged to income available to common shareholders should be reflected retroactively in financial statements for reporting periods ending after September 15,
2003 by restating the financial statements of prior periods on an as filed basis. The company has included these costs in determination of the excess of consideration paid over book value to preferred shareholders in the 2001 consolidated statement
of operations, and therefore, no adjustment was required.





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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 2    Acquisition, Disposition, and Development



Acquisitions



On May 28, 2003, the company completed the acquisition of Merry Land Properties, Inc. (Merry Land), which owned
nine apartment communities containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the company plans to develop into additional apartment homes, and a third party property management
business. The acquisition was structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as a tax-free reorganization and was accounted for under the purchase method of accounting. The
company used various valuation methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of in-place leases and debt assumed. The purchase price was $159.1 million, which includes the
issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger agreement, each Merry Land shareholder received 1.818 of the companys common shares and 0.220 of
the companys Series B convertible preferred shares. A total of 5.0 million common shares and 0.6 million of the companys Series B convertible preferred shares were issued as a result of the merger. The Series B convertible preferred
shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of Merry Lands debt with a fair value of $110.5 million at the date of assumption. No
goodwill was recorded as a result of this transaction. The company allocated a portion of the Merry Land purchase price to an intangible asset based on a valuation of in-place leases at the time of the merger in the amount of $1.1 million. The
company recorded $0.9 million of amortization of the net intangibles in 2003.



Development



The
company has three development projects, two of which were assumed with the Merry Land merger in the amount of $2.2 million. Capitalized interest, real estate taxes, insurance and other costs aggregated approximately $0.1 million and $75,218 during
2003 and 2002, respectively. Land associated with construction in progress was $5.4 million and $1.6 million as of December 31, 2003 and 2002, respectively.



Disposition of Investments



During the first quarter of 2003, the company closed on the sale of two apartment communities containing a total of 395 apartment homes for a total of
$15.9 million and recognized a gain of $1.9 million. As a result of the sales, the companys financial statements have been prepared with these two apartment communities results of operations and the gain from sale isolated and shown as
discontinued operations. All historical statements presented have been restated to conform to this presentation in accordance with SFAS No. 144.



The components of income from operations related to discontinued operations for the years ended December 31, 2003, 2002 and 2001 are shown below. These
include the results of operations through the date of



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



sale for the year ended December 31, 2003 and a full period of operations for the year ended December 31, 2002 and 2001 (dollars in thousands):



|                                    |  |      |       |   |      |   |       |  |   |      
|----------------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | -----
|                                    |  | 2003 |       |   | 2002 |   | 2001 
|Rental and other property income    |  | $    | 363   |   |      | $ | 2,853 |  | $ | 2,955
|                                    |  |      |      
|Expenses:                           |  |      |       |   |      |   |       |  |   |      
|Property and maintenance            |  |      | 158   |   |      |   | 851   |  |   | 788  
|Taxes and insurance                 |  |      | 58    |   |      |   | 398   |  |   | 381  
|Depreciation of real estate assets  |  |      | 162   |   |      |   | 865   |  |   | 906  
|                                    |  |      |       |   |      |   |       |  |   |      
|Total expenses                      |  |      | 378   |   |      |   | 2,114 |  |   | 2,075
|                                    |  |      |       |   |      |   |       |  |   |      
|Net income (loss)                   |  |      | (15   | ) |      |   | 739   |  |   | 880  
|                                    |  |      |      
|Gain on sales of investments        |  |      | 1,887 |   |      |   |      |  |   |     
|                                    |  |      |       |   |      |   |       |  |   |      
|Income from discontinued operations |  | $    | 1,872 |   |      | $ | 739   |  | $ | 880  
|                                    |  |      |       |   |      |   |       |  |   |      



The company had no
assets that qualified as held for disposition as defined by SFAS No. 144 at December 31, 2003.



Note 3    Investment in Rental Property



At December 31, 2003, the companys three largest markets comprised 51% of its real estate owned, at cost. The following is a summary of rental
property owned at December 31, 2003 (in thousands):



|                              |  |                          |           |              |   |                          |  |                |         |  |   |        
|----------------------------- |  | ------------------------ | --------- | ------------ | - | ------------------------ |  | -------------- | ------- |  | - | -------
|Market                        |  | InitialAcquisitionCost * |           | CarryingCost |   | Accumulated Depreciation |  | Encumbrances**
|Dallas/Fort Worth, TX         |  | $                        | 288,067   |              | $ | 318,074                  |  | $              | 54,857  |  | $ | 187,937
|Charlotte, NC                 |  |                          | 163,459   |              |   | 189,974                  |  |                | 34,869  |  |   | 53,866 
|Raleigh/Durham, NC            |  |                          | 133,965   |              |   | 150,384                  |  |                | 29,413  |  |   | 79,827 
|Atlanta, GA                   |  |                          | 96,280    |              |   | 119,158                  |  |                | 21,473  |  |   | 51,846 
|Richmond, VA                  |  |                          | 89,223    |              |   | 102,383                  |  |                | 18,226  |  |   | 71,512 
|Charleston, SC                |  |                          | 87,986    |              |   | 96,361                   |  |                | 9,054   |  |   | 48,788 
|Savannah, GA                  |  |                          | 79,243    |              |   | 80,021                   |  |                | 1,859   |  |   | 60,638 
|Virginia Beach, VA            |  |                          | 28,084    |              |   | 39,790                   |  |                | 14,327  |  |   | 34,684 
|Other (10 markets)            |  |                          | 178,153   |              |   | 205,825                  |  |                | 40,457  |  |   | 125,552
|                              |  |                          |           |              |   |                          |  |                |         |  |   |        
|                              |  |                          | 1,144,460 |              |   | 1,301,970                |  |                | 224,535 |  |   | 801,754
|Real estate under development |  |                          | 5,450     |              |   | 5,450                    |  |                |        |  |   |       
|                              |  |                          |           |              |   |                          |  |                |         |  |   |        
|                              |  | $                        | 1,149,910 |              | $ | 1,307,420                |  | $              | 224,535 |  | $ | 801,754
|                              |  |                          |           |              |   |                          |  |                |         |  |   |        

---

|* |  | Includes real estate commissions, closing costs, and improvements capitalized since the date of acquisition.
|- |  | ------------------------------------------------------------------------------------------------------------

|** |  | The total includes $87.1 million of debt secured by 17 apartment communities which is not allocated among the individual apartment communities.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following is a reconciliation of the carrying amount of real estate owned (in thousands):



|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                  |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Balance at January 1,             |  | $    | 1,158,827 |   |      | $ | 1,070,867 |      |  | $ | 866,841   |  
|Real estate purchased             |  |      | 140,875   |   |      |   | 71,119    |      |  |   | 184,596   |  
|Sale of assets held for sale, net |  |      | (12,993   | ) |      |   | (1,662    | )    |  |   | (885      | )
|Capital lease additions           |  |      | 118       |   |      |   | 1,148     |      |  |   |          |  
|Development of real estate assets |  |      | 4,170     |   |      |   | 1,272     |      |  |   | 1,618     |  
|Sale of land                      |  |      |          |   |      |   |          |      |  |   | (785      | )
|Capital improvements              |  |      | 16,423    |   |      |   | 16,083    |      |  |   | 19,482    |  
|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at December 31,           |  | $    | 1,307,420 |   |      | $ | 1,158,827 |      |  | $ | 1,070,867 |  
|                                  |  |      |           |   |      |   |           |      |  |   |           |  



The following is a
reconciliation of accumulated depreciation (in thousands):



|                        |  |      |         |   |      |   |         |      |  |   |        
|----------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------
|                        |  | 2003 |         |   | 2002 |   |         | 2001
|Balance at January 1,   |  | $    | 172,978 |   |      | $ | 128,653 |      |  | $ | 89,560 
|Depreciation expense    |  |      | 51,901  |   |      |   | 45,157  |      |  |   | 39,093 
|Disposal of assets      |  |      | (344    | ) |      |   | (832    | )    |  |   |       
|                        |  |      |         |   |      |   |         |      |  |   |        
|Balance at December 31, |  | $    | 224,535 |   |      | $ | 172,978 |      |  | $ | 128,653
|                        |  |      |         |   |      |   |         |      |  |   |        



Note
4    Investment in Unconsolidated Real Estate Joint Ventures



In connection with the Merry Land merger, the company acquired interest in two joint ventures. The company assumed a 35% interest in Merritt at Godley Station, LLC, an apartment community under development. The
company does not control this asset and has accounted for its investment under the equity method of accounting. The investment in this joint venture was recorded at cost and subsequently adjusted for equity in net income (loss) and cash
contributions and distributions. The company also assumed a 10% interest in the Cypress Cove joint venture, which owns an apartment community. The company has accounted for its investment under the equity method. The companys investment in
joint ventures was $2.6 million at December 31, 2003.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 5    Notes Payable



Secured



Secured borrowings outstanding at December 31, 2003 and 2002 were as follows (dollars in thousands):



|                    |  |                       |         |                                        |   |         |               |      |   |  |                                 
|------------------- |  | --------------------- | ------- | -------------------------------------- | - | ------- | ------------- | ---- | - |  | --------------------------------
|                    |  | Outstanding Principal |         | EffectiveInterest RateDecember 31,2003 |   |         |              
|                    |  | 2003                  |         | 2002                                   |   |         | Maturity Date
|Fixed rate debt (a) |  | $                     | 5,728   |                                        |   |        |               | 3.09 | % |  | September 2007                  
|                    |  |                       | 36,817  |                                        |   |        |               | 3.72 | % |  | July and August 2009            
|                    |  |                       | 51,881  |                                        |   |        |               | 3.94 | % |  | September 2011 and November 2041
|                    |  |                       | 16,565  |                                        | $ | 16,731  |               | 6.98 | % |  | January 2012                    
|                    |  |                       | 9,226   |                                        |   | 9,332   |               | 6.42 | % |  | November 2011                   
|                    |  |                       | 70,151  |                                        |   | 71,172  |               | 6.75 | % |  | October 2004, May 2011          
|                    |  |                       | 8,333   |                                        |   | 8,417   |               | 7.10 | % |  | July 2011                       
|                    |  |                       | 79,110  |                                        |   | 79,899  |               | 7.16 | % |  | July, August 2011               
|                    |  |                       | 15,276  |                                        |   | 15,442  |               | 6.83 | % |  | May 2011                        
|                    |  |                       | 74,218  |                                        |   | 75,011  |               | 6.99 | % |  | April 2011                      
|                    |  |                       | 141,000 |                                        |   | 141,000 |               | 7.35 | % |  | January 2011                    
|                    |  |                       | 73,500  |                                        |   | 73,500  |               | 7.29 | % |  | October 2006                    
|                    |  |                       | 21,551  |                                        |   | 29,506  |               | 6.48 | % |  | April 2004 through April 2007   
|                    |  |                       | 12,390  |                                        |   | 12,520  |               | 6.68 | % |  | April 2012                      
|                    |  |                       |         |                                        |   |         |               |      |   |  |                                 
|                    |  |                       | 615,746 |                                        |   | 532,530 |               |      |   |  |                                 
|                    |  |                       |         |                                       
|Variable rate debt  |  |                       |        |                                        |   | 15,084  |               | 2.64 | % |  | October 2005                    
|                    |  |                       |        |                                        |   | 992     |               | 2.94 | % |  | October 2005                    
|                    |  |                       | 14,753  |                                        |   | 14,906  |               | 2.62 | % |  | April 2005                      
|                    |  |                       | 15,781  |                                        |   | 15,934  |               | 2.47 | % |  | September 2006                  
|                    |  |                       | 15,000  |                                        |   |        |               | 3.14 | % |  | December 2005                   
|                    |  |                       | 25,000  |                                        |   | 25,000  |               | 5.10 | % |  | January 2005                    
|                    |  |                       | 13,604  |                                        |   |        |               | 2.75 | % |  | May 2005                        
|                    |  |                       | 50,000  |                                        |   |        |               | 2.37 | % |  | July 2005                       
|                    |  |                       | 51,870  |                                        |   |        |               | 1.94 | % |  | August 2008                     
|                    |  |                       |         |                                        |   |         |               |      |   |  |                                 
|                    |  |                       | 186,008 |                                        |   | 71,916  |               |      |   |  |                                 
|                    |  |                       |         |                                       
|Total               |  | $                     | 801,754 |                                        | $ | 604,446 |               |      |   |  |                                 
|                    |  |                       |         |                                        |   |         |               |      |   |  |                                 

---

|(a) |  | Includes fair value premium adjustments aggregating $18.4 million in 2003 and $0.6 million in 2002 that were recorded in connection with assumption of above market rate debt in
connection with the acquisition of apartment communities. These premiums are amortized into interest expense (which reduces interest expense) over the remaining term of the related indebtedness on the effective interest method.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In connection with the Merry Land merger, the
company assumed nine fixed or variable rate mortgage notes with an aggregate principal amount of $90.6 million. These mortgages were recorded at a fair value of $110.5 million at the date of assumption. The difference between the fair value and the
principal amount is being amortized as an adjustment to interest expense over the term of the respective notes. The mortgage notes bear a weighted interest rate of 7.4% per annum and an effective weighted average interest rate of 3.2%, including the
effect of the fair value adjustment. The fixed rate mortgage notes are payable in monthly installments, including principal and interest. The variable rate mortgage note requires payments of interest only. Prepayment penalties apply for early
retirements on the fixed rate mortgage notes. Scheduled maturities are at various dates through September 2011 and one mortgage notes matures November 2041.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During 2003, the company completed a plan of refinancing in which the companys unsecured lines
of credit were replaced with a combination of new secured lines of credit from a commercial bank and three additional secured financing transactions. The following summarizes the new financings:



| |  |  | On May 30, 2003, the company entered into a secured credit facility with a commercial bank. The credit facility provides up to a maximum of $50 million and replaced the $85 million
unsecured line of credit. The secured credit facility is divided into two loans, a $40 million revolving credit facility and a $10 million swingline credit facility. This secured line of credit bears interest at LIBOR plus 1.575% and the
maturity date is May 30, 2005. The credit facility requires quarterly payments of interest only and is secured by seven apartment communities. The company is obligated to pay lenders a quarterly commitment fee equal to .25% per annum of the unused
portion of the credit facility. The secured credit facility agreement contains certain covenants which, among other things, require maintenance of certain financial ratios and includes restrictions on the companys ability to make distributions
to its shareholders over certain amounts. At December 31, 2003, the company was in compliance with this agreement. At December 31, 2003, the outstanding balance was $12.5 million on the credit facility and $1.1 million was outstanding on the
swingline credit facility, which results in an unused credit facility capacity of $36 million at December 31, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On June 27, 2003, the company entered into a $50 million secured financing. The note bears interest at LIBOR plus 125 basis points (2.37% at December 31, 2003). The maturity date is
July 9, 2005 with three one-year extension options. The note requires payments of interest only and is secured by five apartment communities. The note is prepayable after one year without penalty.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 17, 2003, the company entered into $38.5 million in secured financing which is represented by four promissory notes. The notes bear interest at the Discount Mortgage Backed
Security index plus 82 basis points (1.94% at December 31, 2003), and the maturity date is August 1, 2008. These notes require payments of interest only and are secured by four apartment communities. The notes are prepayable after one year with
1% penalty.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 29, 2003, the company entered into $13.3 million in secured financing secured by one apartment community. The note bears interest at the Discount Mortgage Backed Security
index plus 82 basis points (1.94% at December 31, 2003), and the maturity date is September 1, 2008. The notes requires payment of interest only. The note is prepayable after one year with 1% penalty.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Proceeds from these financings repaid the outstanding balance of the
companys $85 million unsecured line of credit, described below, and repaid outstanding secured loans totaling approximately $23.3 million. The remainder of the proceeds from these financings were used for excess borrowing capacity, working
capital needs and other corporate purposes.



During 2002, the
company entered into a $12.6 million fixed rate mortgage note which bears interest at 6.675% per annum. The mortgage note is payable in monthly installments, including principal and interest, and is secured by one apartment community. The company
also entered into a $25 million variable rate mortgage note in conjunction with the acquisition of one apartment community. The note requires monthly payments of interest only. The company assumed $16 million in variable rate mortgage notes in
conjunction with the acquisition of two apartment communities in 2002. The notes require monthly installments, including principal and interest, and are secured by the two apartment communities.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The aggregate maturities of principal, including monthly installments of principal previously
described, for secured debt for the five years subsequent to December 31, 2003 are as follows (in thousands):



|                                      |  |        |        
|------------------------------------- |  | ------ | -------
|Year                                  |  | Amount
|2004                                  |  | $      | 31,829 
|2005                                  |  |        | 131,411
|2006                                  |  |        | 96,731 
|2007                                  |  |        | 14,794 
|2008                                  |  |        | 56,646 
|Thereafter                            |  |        | 451,958
|                                      |  |        |        
|                                      |  |        | 783,369
|                                      | 
|Fair Value Adjustment of Assumed Debt |  |        | 18,385 
|                                      |  |        |        
|                                      |  | $      | 801,754
|                                      |  |        |        



Estimated fair value
is based on mortgage rates believed to be available to the company for the issuance of debt with similar terms and remaining lives. The fair value of the companys fixed and variable rate secured debt at December 31, 2003 and 2002 was $886
million and $695 million, respectively.



Unsecured



Upon completion of the financings described above, the companys $85
million unsecured line of credit was repaid and terminated. At December 31, 2002, borrowings on the unsecured line of credit were $75 million.



During May 2003, the companys $7.5 million unsecured line of credit for general corporate purposes was replaced with a $10 million
swingline secured revolving credit facility, described above. At December 31, 2002, borrowings on the $7.5 million line of credit were $2.9 million.



Capitalized Interest



During 2003 and 2002, the company capitalized interest of $95,590 and $62,222, respectively. Overall, weighted-average interest rate incurred for all
borrowings was 5.9% in 2003 and 6.5% in 2002.



Note
6    Operating Partnership and Shareholders Equity



Operating Partnership



Effective October 1,
2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company (collectively, the Limited Partners), and the company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a
Virginia limited partnership (the Limited Partnership). The company has approximately an 84% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the company. The
Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a
portion of the preferred operating partnership units. If the Limited Partners make the election, the company, at its option, will convert the preferred operating partnership units into either common shares of the company on a one-for-one basis or
cash in an amount per unit equal to the closing price of a common share of the company on the exercise date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During the first quarter of 2003, a total of 887,125 preferred operating partnership units were
converted into common shares on a one-to-one basis. During 2003, the remaining 319,715 non-preferred operating partnership units converted to preferred operating partnership units as certain lease-up and stabilization criteria were met. As of
December 31, 2003, there were 1,807,145 preferred operating partnership units eligible for conversion into common shares on one-for-one basis or cash, at the companys option.



Preferred Stock



The company issued Series A Convertible Preferred Shares in July 1999. The company declared and paid total distributions of $2.3752 per share on the
Series A Convertible Preferred Shares during 2003 and 2002. At December 31, 2003 and 2002, 127,380 preferred shares remained outstanding.



Common Stock



During 2000, the company completed its $50 million common share repurchase program which was authorized by the Board of Directors in September 1999. The
Board authorized the repurchase of up to an additional $50 million of the companys common shares in September 2000. Pursuant to the additional authorization, the company has, as of December 31, 2003, repurchased 2.0 million common shares at an
average price of $10.80 per share for a total cost of $21.3 million. For the year ended December 31, 2003, the company repurchased 26,550 common shares at an average price of $7.17 per share for a total cost of $0.2 million.



In 1997, the company adopted a Dividend Reinvestment and Share Purchase Plan
(as amended from time to time, Plan) which allows any recordholder to reinvest distributions without payment of any brokerage commissions or other fees. Of the total proceeds raised from common shares during the years ended
December 31, 2003, 2002, and 2001, $5.4 million, $6.8 million, and $6.5 million, respectively, were provided through the reinvestment of distributions.



Note 7    Benefits Plans



Stock Incentive Plan



Based on the outstanding shares, under the 1992 Incentive Plan, as amended, a maximum of 2.0 million options could be granted, at the discretion of the
Board of Directors, to certain officers and key employees of the company. Under the Directors Plan, as amended, a maximum of 0.8 million options could be granted to the directors of the company. In 2003, the company granted 69,550 options to
purchase shares under the Directors Plan.



Both of the plans
provide, among other things, that options be granted at exercise prices not lower than the market value of the shares on the date of grant. Under the Incentive Plan, options become exercisable at the date of grant. Generally the optionee has up to
10 years from the date of grant to exercise the options. The exercise prices of these options range from $7.41 to $12.125 per option. Activity in the companys share option plans



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



during the three years ended December 31, 2003 is summarized in the following table (in thousands, except per share data):



|                                                               |  |         |  |                                |       |         |       |   |                                |   |         |  |       |                                |  |   |      
|-------------------------------------------------------------- |  | ------- |  | ------------------------------ | ----- | ------- | ----- | - | ------------------------------ | - | ------- |  | ----- | ------------------------------ |  | - | -----
|                                                               |  |         |  | 2003                           |       |         |       |   | 2002                           |   |         |  |       | 2001                          
|                                                               |  | Options |  | Weighted-AverageExercise Price |       | Options |       |   | Weighted-AverageExercise Price |   | Options |  |       | Weighted-AverageExercise Price
|Outstanding, beginning of year                                 |  | 1,749   |  | $                              | 10.33 |         | 1,725 |   |                                | $ | 10.32   |  | 1,916 |                                |  | $ | 10.35
|Granted                                                        |  | 69      |  |                                | 7.61  |         | 58    |   |                                |   | 10.8    |  | 52    |                                |  |   | 10.62
|Exercised                                                      |  |        |  |                                |      |         | (18   | ) |                                |   | 10.05   |  | (172  | )                              |  |   | 10.55
|Forfeited                                                      |  |        |  |                                |      |         | (16   | ) |                                |   | 11.65   |  | (71   | )                              |  |   | 10.76
|                                                               |  |         |  |                                |       |         |       |   |                                |   |         |  |       |                                |  |   |      
|Outstanding, end of year                                       |  | 1,818   |  |                                | 10.23 |         | 1,749 |   |                                | $ | 10.33   |  | 1,725 |                                |  | $ | 10.32
|                                                               |  |         |  |                                |       |         |       |   |                                |   |         |  |       |                                |  |   |      
|Exercisable at end of year                                     |  | 1,818   |  |                                | 10.23 |         | 1,749 |   |                                | $ | 10.33   |  | 1,725 |                                |  | $ | 10.32
|                                                               |  |         |  |                                |       |         |       |   |                                |   |         |  |       |                                |  |   |      
|Weighted-average fair value of options granted during the year |  |         |  | $                              | 0.06  |         |       |   |                                | $ | 0.41    |  |       |                                |  | $ | 0.19 
|                                                               |  |         |  |                                |       |         |       |   |                                |   |         |  |       |                                |  |   |      



In 1999, Mr. Knight
was granted options (Award Options) to purchase 348,771 of the companys Common Shares at an exercise price of $10.125. If certain events occur, the exercise price will be $1.00 per common share for 180 days following the occurrence
of those events. If such an event occurs, and Mr. Knight either elects not to, or otherwise fails to, exercise any exercisable Award Options, then the company must pay to Mr. Knight the difference between the exercise price and the value of the
common shares that would be obtained upon exercise.



401(K) Savings Plan



Eligible employees of the company participate in a
contributory employee savings plan. Under the plan, the company may match a percentage of contributions made by eligible employees, such percentage to apply to a maximum of 3% of their annual salary. Contribution expenses under this plan for 2003,
2002 and 2001 were $116,889, $82,427, and $73,894, respectively.



Note
8    Related-Party Transactions



During 2003, Mr. Glade M. Knight, the companys Chairman and Chief Executive Officer, served as Chairman and Chief Executive Officer of three extended-stay hotel REITs, Apple Suites, Inc., Apple Hospitality Two, Inc., and Apple
Hospitality Five, Inc., and also owned companies which provided services to these entities. Apple Hospitality Two, Inc. acquired Apple Suites, Inc. in a merger transaction during the first quarter of 2003. During 2003 and 2002, the company provided
real estate acquisition and offering-related and other services to these entities and received payment of approximately $0.2 million and $0.6 million, respectively.



Other Relationships



Leslie A. Grandis, a director of the company, is also a partner in McGuireWoods LLP, which provides outside legal services to the company During 2003 and
2002, the company paid $1.6 million and $0.9 million, respectively for services provided by McGuire Woods LLP.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 9    Earnings Per Share



The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):



|                                                                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                                      |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Numerator:                                                                                                            |  |      |        |   |      |   |        |      |  |   |         |  
|Net (loss) income available to common shareholders                                                                    |  | $    | (7,601 | ) |      | $ | (83    | )    |  | $ | (17,200 | )
|Numerator for basic and diluted earnings per share  income available to common stockholders after assumed
conversion |  | $    | (7,601 | ) |      | $ | (83    | )    |  | $ | (17,200 | )
|Denominator:                                                                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|Denominator for basic earnings per share-weighted-average shares                                                      |  |      | 52,643 |   |      |   | 48,068 |      |  |   | 43,450  |  
|Effect of dilutive securities:                                                                                        |  |      |        |   |      |   |        |      |  |   |         |  
|Stock options                                                                                                         |  |      |       |   |      |   |       |      |  |   |        |  
|                                                                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions                   |  |      | 52,643 |   |      |   | 48,068 |      |  |   | 43,450  |  
|Basic and diluted earnings per common share                                                                           |  | $    | (0.14  | ) |      | $ | 0.00   |      |  | $ | (0.40   | )
|                                                                                                                      |  |      |        |   |      |   |        |      |  |   |         |  



Note
10    Commitments



The company has
capital leases on certain equipment. The leases generally provide for the lessee to pay taxes, maintenance, insurance and certain other operating costs of the leased property which are expensed as incurred. The following is a summary of the future
minimum payments subsequent to December 31, 2003 (in thousands):



|           |  |        |      
|---------- |  | ------ | -----
|Year       |  | Amount
|2004       |  | $      | 291  
|2005       |  |        | 306  
|2006       |  |        | 304  
|2007       |  |        | 197  
|2008       |  |        | 60   
|Thereafter |  |        | 44   
|           |  |        |      
|           |  | $      | 1,202
|           |  |        |      



The company intends to
purchase an apartment community subject to certain conditions which are expected to be met during the first quarter of 2004 and will be combined with an existing apartment community. The expected purchase price is $11.0 million.



The company has three development projects, two of which were assumed with
the Merry Land merger mentioned above and are to be completed during 2005. The companys share of estimated future cash expenditures to complete these projects will be funded through advances on future construction loans.





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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 11    Quarterly Financial Data (Unaudited)



The following is a summary of quarterly results of operations for the years
ended December 31, 2003 and 2002 (in thousands):



|                                                                    |  |              |        |   |               |   |        |              |  |   |                |   |  |   |        |  
|------------------------------------------------------------------- |  | ------------ | ------ | - | ------------- | - | ------ | ------------ |  | - | -------------- | - |  | - | ------ | -
|                                                                    |  | FirstQuarter |        |   | SecondQuarter |   |        | ThirdQuarter |  |   | Fourth Quarter |  
|2003                                                                |  |              |        |   |               |   |        |              |  |   |                |   |  |   |        |  
|Revenues                                                            |  | $            | 39,998 |   |               | $ | 42,018 |              |  | $ | 44,972         |   |  | $ | 44,664 |  
|Income before interest income (expense)                             |  |              | 9,201  |   |               |   | 9,084  |              |  |   | 9,457          |   |  |   | 8,448  |  
|Income from discontinued operations                                 |  |              | 1,982  |   |               |   | (27    | )            |  |   | (3             | ) |  |   | (80    | )
|Net income (loss)                                                   |  |              | 286    |   |               |   | (2,230 | )            |  |   | (2,286         | ) |  |   | (3,068 | )
|Distributions to preferred shareholders                             |  |              | 76     |   |               |   | 75     |              |  |   | 76             |   |  |   | 76     |  
|Net income (loss) available to common shareholders                  |  |              | 210    |   |               |   | (2,305 | )            |  |   | (2,362         | ) |  |   | (3,144 | )
|Basic and diluted earnings per common share-continuing operations   |  |              | (0.04  | ) |               |   | (0.04  | )            |  |   | (0.04          | ) |  |   | (0.06  | )
|Basic and diluted earnings per common share-discontinued operations |  |              | 0.04   |   |               |   |       |              |  |   |               |   |  |   |       |  
|Basic and diluted earnings per common share                         |  |              |       |   |               |   | (0.04  | )            |  |   | (0.04          | ) |  |   | (0.06  | )
|Distributions per common share                                      |  |              | 0.28   |   |               |   | 0.20   |              |  |   | 0.20           |   |  |   | 0.20   |  
|                                                                    |  |              |        |  
|2002                                                                |  |              |        |   |               |   |        |              |  |   |                |   |  |   |        |  
|Revenues                                                            |  | $            | 39,967 |   |               | $ | 40,743 |              |  | $ | 39,755         |   |  | $ | 39,401 |  
|Income before interest income (expense)                             |  |              | 12,148 |   |               |   | 12,024 |              |  |   | 8,265          |   |  |   | 8,661  |  
|Income from discontinued operations                                 |  |              | 209    |   |               |   | 156    |              |  |   | 122            |   |  |   | 252    |  
|Net income (loss)                                                   |  |              | 2,284  |   |               |   | 1,772  |              |  |   | (2,184         | ) |  |   | (1,652 | )
|Distributions to preferred shareholders                             |  |              | 76     |   |               |   | 76     |              |  |   | 76             |   |  |   | 75     |  
|Net income (loss) available to common shareholders                  |  |              | 2,208  |   |               |   | 1,696  |              |  |   | (2,260         | ) |  |   | (1,727 | )
|Basic and diluted earnings per common share-continuing operations   |  |              | 0.04   |   |               |   | 0.03   |              |  |   | (0.05          | ) |  |   | (0.04  | )
|Basic and diluted earnings per common share-discontinued operations |  |              | 0.01   |   |               |   | 0.01   |              |  |   |               |   |  |   |       |  
|Basic and diluted earnings per common share                         |  |              | 0.05   |   |               |   | 0.04   |              |  |   | (0.05          | ) |  |   | (0.04  | )
|Distributions per common share                                      |  |              | 0.28   |   |               |   | 0.28   |              |  |   | 0.28           |   |  |   | 0.28   |  



Note
12    Industry Segments



The company
owns and operates multifamily apartment communities throughout the southern regions of the United States that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The company
separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities has similar economic characteristics, facilities, services, and tenants, the apartment communities have been aggregated
into a single apartment communities segment. All segment disclosure is included in or can be derived from the companys consolidated financial statements.



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CORNERSTONE REALTY INCOME, INC.



SCHEDULE III



REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)



|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |   |           |  |               |           |               |   |            |  |   |            |  |   |           |  |      |  |                |  |          
|------------------------------------------------------------------------------- |  | --------------- | ---------- | ------------- | - | ------------------------------ | ---- | -------------------- | ------------- | ----- | - | --------- |  | ------------- | --------- | ------------- | - | ---------- |  | - | ---------- |  | - | --------- |  | ---- |  | -------------- |  | ---------
|Description                                                                     |  | Encumbrances(2) |            | Initial Cost  |   | Subsequently Capitalized Impr. |      | Gross Amount Carried |               | Total |   | Acc. Dep. |  | Dateof Const. |           | Date Acquired |   | Dep.Life  
|                                                                                |  | Land            |            | Bldg. & Impr. |   |                                | Land |                      | Bldg. & Impr. |       |   |           |  |              
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|1) Mayflower Seaside * Virginia Beach, VA * Multi-family housing * Retail shops |  | $               | 10,500,000 |               | $ | 2,258,169                      |      | $                    | 5,375,975     |       | $ | 5,553,127 |  | $             | 2,258,248 |               | $ | 10,929,023 |  | $ | 13,187,271 |  | $ | 3,738,167 |  | 1950 |  | Oct. 26, 1993  |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|2) Stone Ridge * Columbia, SC * Multi-family housing                            |  |                 |           |               |   | 374,271                        |      |                      | 2,950,729     |       |   | 3,363,548 |  |               | 374,292   |               |   | 6,314,256  |  |   | 6,688,548  |  |   | 2,757,281 |  | 1975 |  | Dec. 8, 1993   |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|3) Harbour Club * Virginia Beach, VA * Multi-family housing                     |  |                 | 8,331,115  |               |   | 1,019,895                      |      |                      | 4,230,105     |       |   | 2,325,158 |  |               | 1,020,275 |               |   | 6,554,883  |  |   | 7,575,158  |  |   | 5,021,936 |  | 1988 |  | May 1, 1994    |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|4) The Trestles * Raleigh, NC * Multi-family housing                            |  |                 |           |               |   | 2,650,884                      |      |                      | 7,699,116     |       |   | 1,939,223 |  |               | 2,686,006 |               |   | 9,603,217  |  |   | 12,289,223 |  |   | 3,676,957 |  | 1987 |  | Dec. 30, 1994  |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|5) Mill Creek *
Winston-Salem, NC * Multi-family housing                        |  |                 | 6,207,500  |               |   | 1,368,000                      |      |                      | 7,182,000     |       |   | 1,774,246 |  |               | 1,417,614 |               |   | 8,906,632  |  |   | 10,324,246 |  |   | 2,954,649 |  | 1984 |  | Sept. 1, 1995  |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|6) Glen Eagles                                                                  |  |                 | 10,010,000 |               |   | 1,095,000                      |      |                      | 6,205,000     |       |   | 1,869,955 |  |               | 3,383,450 |               |   | 15,374,158 |  |   | 18,757,608 |  |   | 3,708,397 |  | 1990 |  | Oct. 1, 1995   |  | 27.5 yrs.
|Prestwick * Winston-Salem, NC * Multi-family housing                            |  |                 |            |               |   | 2,492,790                      |      |                      | 7,094,863     |       |   |           |  |               |           |               |   |            |  |   |            |  |   |           |  | 2000 |  | Sept. 11, 2000 |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|7) Tradewinds * Hampton, VA * Multi-family housing                              |  |                 | 10,852,861 |               |   | 1,428,000                      |      |                      | 8,772,000     |       |   | 2,398,306 |  |               | 1,436,890 |               |   | 11,161,416 |  |   | 12,598,306 |  |   | 3,724,872 |  | 1988 |  | Nov. 1, 1995   |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|8) The Meadows                                                                  |  |                 | 14,885,000 |               |   | 186,000                        |      |                      | 6,014,000     |       |   | 1,950,994 |  |               | 625,419   |               |   | 19,161,575 |  |   | 19,786,994 |  |   | 3,748,301 |  | 1974 |  | Jan. 31, 1996  |  | 27.5 yrs.
|Enclave                                                                         |  |                 |            |               |   | 351,440                        |      |                      | 8,434,560     |       |   |           |  |               |           |               |   |            |  |   |            |  |   |           |  | 2000 |  | Mar. 16, 2000  |  | 27.5 yrs.
|Phase 2 Section 2 * Asheville, NC * Multi-family housing                        |  |                 |            |               |   | 114,000                        |      |                      | 2,736,000     |       |   |           |  |               |           |               |   |            |  |   |            |  |   |           |  |      |  | May 7, 2001    |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|9) Ashley Park * Richmond, VA * Multi-family housing                            |  |                 | 9,500,000  |               |   | 1,586,650                      |      |                      | 10,618,350    |       |   | 1,750,955 |  |               | 1,589,251 |               |   | 12,366,704 |  |   | 13,955,955 |  |   | 3,947,010 |  | 1988 |  | March 1, 1996  |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|10) Arbor Trace * Virginia Beach, VA * Multi-family housing                     |  |                 | 5,000,000  |               |   | 1,100,000                      |      |                      | 3,900,000     |       |   | 1,428,903 |  |               | 1,130,750 |               |   | 5,298,153  |  |   | 6,428,903  |  |   | 1,841,839 |  | 1985 |  | March 1, 1996  |  | 27.5 yrs.
|                                                                                |  |                 |            |               |   |                                |      |                      |               |       |  
|11) Bridgetown Bay * Charlotte, NC * Multi-family housing                       |  |                 |           |               |   | 603,000                        |      |                      | 4,422,000     |       |   | 1,426,915 |  |               | 624,233   |               |   | 5,827,682  |  |   | 6,451,915  |  |   | 1,871,294 |  | 1986 |  | April 1, 1996  |  | 27.5 yrs.



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all oREAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)(Continued)



|                                                                    |  |                 |  |               |  |                                |      |                      |               |           |  |            |  |                |  |               |  |           |  |                |  |          
|------------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | -------------------- | ------------- | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | -------------- |  | ---------
|Description                                                         |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross Amount Carried |               | Total     |  | Acc. Dep.  |  | Date of Const. |  | Date Acquired |  | Dep. Life
|                                                                    |  | Land            |  | Bldg. & Impr. |  |                                | Land |                      | Bldg. & Impr. |           |  |            |  |               
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|12) Trophy Chase * Charlottesville, VA * Multi-family housing       |  | 15,000,000      |  | 2,455,980     |  | 10,173,011                     |      | 6,697,582            |               | 2,483,638 |  | 16,842,935 |  | 19,326,573     |  | 4,725,485     |  | 1970      |  | April 1, 1996  |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|13) Beacon Hill * Charlotte, NC * Multi-family housing              |  |                |  | 3,121,587     |  | 10,457,616                     |      | 3,377,015            |               | 3,076,213 |  | 13,880,005 |  | 16,956,218     |  | 4,288,309     |  | 1985      |  | May 1, 1996    |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|14) Summerwalk * Concord, NC * Multi-family housing                 |  | 6,000,000       |  | 1,528,200     |  | 4,131,800                      |      | 2,557,332            |               | 1,565,050 |  | 6,652,282  |  | 8,217,332      |  | 2,278,336     |  | 1983      |  | May 1, 1996    |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|15) The Landing * Raleigh, NC * Multi-family housing                |  | 7,442,500       |  | 1,001,400     |  | 7,343,600                      |      | 2,480,256            |               | 1,023,951 |  | 9,801,305  |  | 10,825,256     |  | 3,050,563     |  | 1984      |  | May 1, 1996    |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|16) Meadow Creek * Pineville, NC * Multi-family housing             |  | 9,376,481       |  | 1,110,000     |  | 9,990,000                      |      | 2,867,192            |               | 1,134,435 |  | 12,832,757 |  | 13,967,192     |  | 3,958,565     |  | 1984      |  | May 31, 1996   |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|17) Trolley Square                                                  |  | 9,500,000       |  | 1,620,000     |  | 4,380,000                      |      | 4,320,715            |               | 2,817,604 |  | 11,745,686 |  | 14,563,290     |  | 4,072,316     |  | 1968      |  | June 25, 1996  |  | 27.5 yrs.
|Trolley Square West * Richmond, VA * Multi-family housing           |  |                 |  | 1,145,495     |  | 3,097,080                      |      |                      |               |           |  |            |  |                |  |               |  | 1964      |  | Dec. 31, 1996  |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|18) Paces Glen * Charlotte, NC * Multi-family housing               |  |                |  | 2,153,250     |  | 5,271,750                      |      | 1,711,247            |               | 2,226,400 |  | 6,909,847  |  | 9,136,247      |  | 2,055,098     |  | 1986      |  | July 19, 1996  |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|19) Hampton Glen * Richmond, VA * Multi-family housing              |  | 12,389,822      |  | 1,391,992     |  | 10,207,939                     |      | 2,445,475            |               | 1,419,188 |  | 12,626,218 |  | 14,045,406     |  | 3,757,414     |  | 1986      |  | August 1, 1996 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|20) Heatherwood                                                     |  | 16,250,000      |  | 2,449,310     |  | 7,756,147                      |      | 9,939,068            |               | 4,186,843 |  | 23,382,682 |  | 27,569,525     |  | 7,522,322     |  | 1980      |  | Sept. 1, 1996  |  | 27.5 yrs.
|Italian Village/Villa Marina * Charlotte, NC * Multi-family housing |  |                 |  | 1,707,750     |  | 5,717,250                      |      |                      |               |           |  |            |  |                |  |               |  | 1980      |  | Aug. 29, 1997  |  |          
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|21) Highland Hills * Carrboro, NC * Multi-family housing            |  | 14,524,156      |  | 1,210,000     |  | 10,890,000                     |      | 3,501,329            |               | 1,198,724 |  | 14,402,605 |  | 15,601,329     |  | 4,578,045     |  | 1987      |  | Sept. 27, 1996 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|22) Parkside at Woodlake * Durham, NC * Multi-family housing        |  | 9,000,000       |  | 2,932,778     |  | 11,731,108                     |      | 1,395,920            |               | 2,884,918 |  | 13,174,888 |  | 16,059,806     |  | 3,891,081     |  | 1996      |  | Aug. 31, 1996  |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|23) Greenbrier * Fredericksburg, VA * Multi-family housing          |  | 12,533,536      |  | 998,957       |  | 10,100,568                     |      | 1,799,769            |               | 1,009,699 |  | 11,889,595 |  | 12,899,294     |  | 3,778,491     |  | 1980      |  | Oct. 1, 1996   |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                      |               |           | 
|23) Deerfield * Durham, NC * Multi-family housing                   |  | 9,992,454       |  | 427,000       |  | 10,248,000                     |      | 1,325,561            |               | 430,416   |  | 11,570,145 |  | 12,000,561     |  | 3,329,923     |  | 1985      |  | Nov. 1, 1996   |  | 27.5 yrs.



55



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)(Continued)



|                                                                     |  |                 |  |               |  |                                |      |                     |               |           |  |            |  |               |  |               |  |          |  |                |  |          
|-------------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------- | --------- |  | ---------- |  | ------------- |  | ------------- |  | -------- |  | -------------- |  | ---------
|Description                                                          |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |               | Total     |  | Acc.Dep.   |  | Dateof Const. |  | Date Acquired |  | Dep.Life
|                                                                     |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. & Impr. |           |  |            |  |              
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|25) The Arbors at Windsor Lake * Columbia, SC * Multi-family housing |  |                |  | 978,750       |  | 9,896,250                      |      | 1,452,274           |               | 994,426   |  | 11,332,848 |  | 12,327,274    |  | 3,250,202     |  | 1991     |  | Jan. 1, 1997   |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|26) Westchase * Charleston, SC * Multi-family housing                |  |                |  | 1,980,000     |  | 9,020,000                      |      | 3,418,536           |               | 2,012,328 |  | 12,406,208 |  | 14,418,536    |  | 3,859,740     |  | 1985     |  | Jan. 15, 1997  |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|27) Carlyle Club * Lawrenceville, GA * Multi-family housing          |  | 13,700,000      |  | 3,589,800     |  | 7,990,200                      |      | 3,341,829           |               | 3,607,026 |  | 11,314,803 |  | 14,921,829    |  | 3,409,805     |  | 1974     |  | Apr. 30, 1997  |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|28) Ashley Run * Norcross, GA * Multi-family housing                 |  |                |  | 3,780,000     |  | 14,220,000                     |      | 4,263,394           |               | 3,793,621 |  | 18,469,773 |  | 22,263,394    |  | 5,129,366     |  | 1987     |  | Apr. 30, 1997  |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|29) Charleston Place * Charlotte, NC * Multi-family housing          |  |                |  | 1,516,000     |  | 7,959,000                      |      | 1,546,145           |               | 1,534,603 |  | 9,486,542  |  | 11,021,145    |  | 2,624,257     |  | 1986     |  | May 13, 1997   |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|30) Dunwoody Springs * Dunwoody, GA * Multi-family housing           |  | 13,325,000      |  | 3,648,000     |  | 11,552,000                     |      | 7,293,488           |               | 3,662,295 |  | 18,831,193 |  | 22,493,488    |  | 5,284,408     |  | 1981     |  | July 25, 1997  |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|31) Clarion Crossing                                                 |  | 11,000,000      |  | 2,860,000     |  | 7,740,000                      |      | 996,979             |               | 3,235,961 |  | 11,986,506 |  | 15,222,467    |  | 2,385,493     |  | 1972     |  | Sept. 30, 1997 |  | 27.5 yrs.
|Phase II * Raleigh, NC * Multi-family housing                        |  |                 |  | 320,000       |  | 3,305,488                      |      |                     |               |           |  |            |  |               |  |               |  | 2002     |  | Sept. 30, 1997 |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|32) Stone Brook * Norcross, GA * Multi-family housing                |  |                |  | 1,570,000     |  | 6,280,000                      |      | 2,289,267           |               | 1,582,468 |  | 8,556,799  |  | 10,139,267    |  | 2,273,004     |  | 1986     |  | Oct. 31, 1997  |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|33) St. Regis * Raleigh, NC * Multi-family housing                   |  |                |  | 2,156,000     |  | 7,644,000                      |      | 1,541,523           |               | 2,170,353 |  | 9,171,170  |  | 11,341,523    |  | 2,228,883     |  | 1986     |  | Oct. 31, 1997  |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|34) Remington Place * Raleigh, NC * Multi-family housing             |  |                |  | 1,422,000     |  | 6,478,000                      |      | 1,317,273           |               | 1,433,609 |  | 7,783,664  |  | 9,217,273     |  | 1,881,900     |  | 1985     |  | Oct. 31, 1997  |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|35) Stone Point * Charlotte, NC * Multi-family housing               |  |                |  | 1,164,000     |  | 8,536,000                      |      | 1,036,845           |               | 1,119,156 |  | 9,617,689  |  | 10,736,845    |  | 2,353,728     |  | 1986     |  | Jan.15, 1998   |  | 27.5 yrs.
|                                                                     |  |                 |  |               |  |                                |      |                     |               |           | 
|36) Pinnacle Ridge * Ashville, NC * Multi-family housing             |  | 4,893,565       |  | 1,547,410     |  | 4,183,740                      |      | 1,687,311           |               | 1,572,517 |  | 5,845,944  |  | 7,418,461     |  | 1,439,078     |  | 1951     |  | April 1, 1998  |  | 27.5 yrs.



56



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)(Continued)



|                                                                  |  |                 |  |               |  |                                |      |                     |               |           |  |            |  |                |  |               |  |          |  |               |  |          
|----------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------- | --------- |  | ---------- |  | -------------- |  | ------------- |  | -------- |  | ------------- |  | ---------
|Description                                                       |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |               | Total     |  | Acc.Dep.   |  | Date of Const. |  | Date Acquired |  | Dep.Life
|                                                                  |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. & Impr. |           |  |            |  |               
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|37) Hampton Pointe * Charleston, SC * Multi-family housing        |  |                |  | 1,589,250     |  | 10,635,750                     |      | 4,636,267           |               | 1,651,535 |  | 15,209,732 |  | 16,861,267     |  | 3,738,706     |  | 1986     |  | Mar 31, 1998  |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|38) The Timbers * Raleigh, NC * Multi-family housing              |  |                |  | 1,944,000     |  | 6,156,000                      |      | 1,242,911           |               | 1,955,740 |  | 7,387,171  |  | 9,342,911      |  | 1,830,273     |  | 1983     |  | June 4, 1998  |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|39) The Gables * Richmond, VA * Multi-family housing              |  | 8,000,000       |  | 2,185,000     |  | 9,315,000                      |      | 2,013,942           |               | 2,200,818 |  | 11,313,124 |  | 13,513,942     |  | 2,758,131     |  | 1987     |  | July 2, 1998  |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|40) Spring Lake * Morrow, GA * Multi-family housing               |  |                |  | 900,000       |  | 8,100,000                      |      | 1,737,457           |               | 907,577   |  | 9,829,880  |  | 10,737,457     |  | 2,286,437     |  | 1986     |  | Aug. 12, 1998 |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|41) Cape Landing * Myrtle Beach, SC * Multi-family housing        |  | 9,050,000       |  | 1,026,000     |  | 16,074,000                     |      | 2,728,429           |               | 1,024,973 |  | 18,803,456 |  | 19,828,429     |  | 4,280,264     |  | 1997/98  |  | Oct. 16, 1998 |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|42) Brookfield * Dallas, TX * Multi-family housing                |  |                |  | 1,624,051     |  | 6,390,482                      |      | 118,857             |               | 1,579,820 |  | 6,553,570  |  | 8,133,390      |  | 1,593,215     |  | 1984     |  | July 23, 1999 |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|43) Eagle Crest * Irving, TX * Multi-family housing               |  | 15,000,000      |  | 4,038,424     |  | 17,527,893                     |      | 1,345,061           |               | 4,038,424 |  | 18,872,954 |  | 22,911,378     |  | 3,469,808     |  | 1983     |  | July 23, 1999 |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|44) Aspen Hills Apartments * Arlington, TX * Multi-family housing |  |                |  | 1,129,071     |  | 6,094,651                      |      | 830,199             |               | 1,129,071 |  | 6,924,850  |  | 8,053,921      |  | 1,911,341     |  | 1979     |  | July 23, 1999 |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|45) Mill Crossing * Arlington, TX * Multi-family housing          |  |                |  | 803,095       |  | 4,466,697                      |      | 541,400             |               | 803,061   |  | 5,008,131  |  | 5,811,192      |  | 1,359,123     |  | 1979     |  | July 23, 1999 |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|46) Wildwood Apartments * Euless, TX * Multi-family housing       |  | 3,324,300       |  | 881,479       |  | 3,589,815                      |      | 492,164             |               | 881,538   |  | 4,081,920  |  | 4,963,458      |  | 1,034,586     |  | 1984     |  | July 23, 1999 |  | 27.5 yrs.
|                                                                  |  |                 |  |               |  |                                |      |                     |               |           | 
|47) Toscana Apartments * Dallas, TX * Multi-family housing        |  | 5,250,000       |  | 998,938       |  | 6,335,085                      |      | 298,366             |               | 1,048,886 |  | 6,583,503  |  | 7,632,389      |  | 1,324,231     |  | 1986     |  | July 23, 1999 |  | 27.5 yrs.



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)(Continued)



|                                                                    |  |                 |  |               |  |                                |      |                     |               |           |  |            |  |                |  |               |  |           |  |               |  |          
|------------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------- | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | ------------- |  | ---------
|Description                                                         |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |               | Total     |  | Acc.Dep.   |  | Date of Const. |  | Date Acquired |  | Dep.Life 
|                                                                    |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. & Impr. |           |  |            |  |               
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|48) The Arbors on Forest Ridge * Bedford, TX * Multi-family housing |  | 6,250,000       |  | 862,803       |  | 8,711,151                      |      | 662,606             |               | 1,012,320 |  | 9,224,240  |  | 10,236,560     |  | 1,761,375     |  | 1986      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|49) Paces Cove * Dallas, TX * Multi-family housing                  |  | 10,916,414      |  | 2,259,317     |  | 9,453,562                      |      | 1,003,866           |               | 2,219,403 |  | 10,497,342 |  | 12,716,745     |  | 2,114,141     |  | 1982      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|50) Remington Hills * Irving, TX * Multi-family housing             |  | 14,250,000      |  | 4,509,071     |  | 16,412,148                     |      | 5,583,029           |               | 4,209,108 |  | 22,295,140 |  | 26,504,248     |  | 4,145,162     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|51) Copper Crossing * Fort Worth, TX * Multi-family housing         |  |                |  | 1,782,562     |  | 9,994,421                      |      | 1,402,798           |               | 1,778,407 |  | 11,401,374 |  | 13,179,781     |  | 2,874,229     |  | 1980/1981 |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|52) Main Park * Duncanville, TX * Multi-family housing              |  | 8,276,528       |  | 619,641       |  | 8,463,326                      |      | 618,355             |               | 670,947   |  | 9,030,375  |  | 9,701,322      |  | 1,882,740     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|53) Timberglen * Dallas, TX * Multi-family housing                  |  | 9,500,000       |  | 2,563,522     |  | 10,657,083                     |      | 1,135,295           |               | 2,548,094 |  | 11,807,806 |  | 14,355,900     |  | 2,678,189     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|54) Silverbrook I * Grand Prairie, TX * Multi-family housing        |  | 15,275,910      |  | 3,352,896     |  | 12,356,997                     |      | 2,452,212           |               | 3,321,137 |  | 14,840,968 |  | 18,162,105     |  | 3,709,939     |  | 1982      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|55) Summer Tree * Dallas, TX * Multi-family housing                 |  | 7,618,424       |  | 3,338,748     |  | 4,385,408                      |      | 1,114,278           |               | 3,156,485 |  | 5,681,949  |  | 8,838,434      |  | 1,532,248     |  | 1980      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|56) Park Village * Bedford, TX * Multi-family housing               |  | 8,355,690       |  | 928,744       |  | 7,295,797                      |      | 844,471             |               | 954,542   |  | 8,114,470  |  | 9,069,012      |  | 1,874,143     |  | 1983      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|57) Cottonwood * Arlington, TX * Multi-family housing               |  | 5,920,187       |  | 474,344       |  | 5,797,412                      |      | 1,345,345           |               | 473,616   |  | 7,143,485  |  | 7,617,101      |  | 1,621,812     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|58) Devonshire * Dallas, TX * Multi-family housing                  |  | 3,571,283       |  | 1,892,165     |  | 5,672,727                      |      | 850,683             |               | 1,893,378 |  | 6,522,197  |  | 8,415,575      |  | 1,684,814     |  | 1978      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|59) Paces Point * Lewisville, TX * Multi-family housing             |  |                |  | 2,132,795     |  | 10,847,450                     |      | 1,014,767           |               | 2,132,694 |  | 11,862,318 |  | 13,995,012     |  | 2,538,365     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                    |  |                 |  |               |  |                                |      |                     |               |           | 
|60) The Meridian * Austin, TX * Multi-family housing                |  | 2,756,297       |  | 531,832       |  | 7,007,392                      |      | 1,145,547           |               | 531,469   |  | 8,153,302  |  | 8,684,771      |  | 1,821,350     |  | 1988      |  | July 23, 1999 |  | 27.5 yrs.



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)(Continued)



|                                                                 |  |                 |  |               |  |                                |      |                     |               |           |  |            |  |                |  |               |  |           |  |               |  |          
|---------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------- | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | ------------- |  | ---------
|Description                                                      |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |               | Total     |  | Acc.Dep.   |  | Date of Const. |  | Date Acquired |  | Dep.Life 
|                                                                 |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. & Impr. |           |  |            |  |               
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|61) Grayson II * Grapevine, TX * Multi-family housing            |  | 6,075,077       |  | 962,939       |  | 11,247,182                     |      | 790,813             |               | 913,575   |  | 12,087,359 |  | 13,000,934     |  | 2,582,987     |  | 1986      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|62) Silverbrook II * Grand Prairie, TX * Multi-family housing    |  | 2,760,953       |  | 1,202,745     |  | 4,605,505                      |      | 704,797             |               | 1,177,125 |  | 5,335,922  |  | 6,513,047      |  | 1,241,358     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|63) Estrada Oaks * Irving, TX * Multi-family housing             |  | 9,226,247       |  | 1,939,650     |  | 8,847,232                      |      | 821,141             |               | 1,929,226 |  | 9,678,797  |  | 11,608,023     |  | 2,007,114     |  | 1983      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|64) Burney Oaks * Arlington, TX * Multi-family housing           |  | 8,332,528       |  | 1,063,277     |  | 8,901,959                      |      | 1,090,635           |               | 1,063,211 |  | 9,992,660  |  | 11,055,871     |  | 2,245,014     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|65) Cutter's Point * Richardson, TX * Multi-family housing       |  | 6,250,000       |  | 2,001,796     |  | 7,858,044                      |      | 1,545,388           |               | 2,001,916 |  | 9,403,312  |  | 11,405,228     |  | 2,273,693     |  | 1978      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|66) The Courts on Pear Ridge * Dallas, TX * Multi-family housing |  | 10,395,462      |  | 2,360,962     |  | 9,482,729                      |      | 584,132             |               | 2,360,995 |  | 10,066,828 |  | 12,427,823     |  | 1,969,693     |  | 1988      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|67) Sierra Ridge * San Antonio, TX * Multi-family housing        |  | 4,750,000       |  | 611,683       |  | 6,012,983                      |      | 1,999,358           |               | 610,950   |  | 8,013,074  |  | 8,624,024      |  | 1,884,083     |  | 1981      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|68) Grayson I * Grapevine, TX * Multi-family housing             |  | 6,387,825       |  | 770,541       |  | 9,178,418                      |      | 2,237,116           |               | 863,674   |  | 11,322,401 |  | 12,186,075     |  | 2,326,256     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|69) Canyon Hills * Austin, TX * Multi-family housing             |  | 12,459,809      |  | 1,233,883     |  | 11,278,619                     |      | 468,237             |               | 1,235,408 |  | 11,745,331 |  | 12,980,739     |  | 2,209,062     |  | 1996      |  | July 23, 1999 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|70) Greystone Crossing * Charlotte, NC * Multi-family housing    |  |                |  | 1,340,000     |  | 25,460,000                     |      | 1,325,243           |               | 1,332,635 |  | 26,792,608 |  | 28,125,243     |  | 3,820,120     |  | 1998\2000 |  | May 8, 2000   |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|71) Chase Gayton * Richmond, VA * Multi-family housing           |  | 15,557,197      |  | 2,541,000     |  | 18,634,000                     |      | 1,288,857           |               | 2,534,142 |  | 19,929,715 |  | 22,463,857     |  | 1,970,758     |  | 1984      |  | June 21, 2001 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|72) Poplar Place * Kennesaw, GA * Multi-family housing           |  | 24,820,504      |  | 5,544,000     |  | 29,106,000                     |      | 3,952,702           |               | 5,760,883 |  | 32,841,819 |  | 38,602,702     |  | 3,089,735     |  | 1989/1995 |  | Sept. 7, 2001 |  | 27.5 yrs.
|                                                                 |  |                 |  |               |  |                                |      |                     |               |           | 
|73) Autumn Park * Greensboro, NC * Multi-family housing          |  | 14,752,857      |  | 2,007,433     |  | 18,066,894                     |      | 75,261              |               | 1,939,518 |  | 18,210,070 |  | 20,149,588     |  | 1,609,559     |  | 2001      |  | Oct. 1, 2001  |  | 27.5 yrs.



59



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)(Continued)



|                                                                      |  |                 |  |               |  |                                |      |                     |               |           |  |            |  |               |  |               |  |          |  |                |  |          
|--------------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------- | --------- |  | ---------- |  | ------------- |  | ------------- |  | -------- |  | -------------- |  | ---------
|Description                                                           |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |               | Total     |  | Acc.Dep.   |  | Dateof Const. |  | Date Acquired |  | Dep.Life
|                                                                      |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. & Impr. |           |  |            |  |              
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|74) Legacy Park * Charlotte, NC * Multi-family housing                |  | 7,250,000       |  | 1,313,311     |  | 20,575,211                     |      | 91,135              |               | 1,266,328 |  | 20,713,329 |  | 21,979,657    |  | 1,821,342     |  | 2001     |  | Oct. 1, 2001   |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|75) Timber Crest * Charlotte, NC * Multi-family housing               |  | 14,989,944      |  | 1,144,569     |  | 17,931,580                     |      | 413,689             |               | 1,270,350 |  | 18,219,488 |  | 19,489,838    |  | 1,633,394     |  | 2000     |  | Oct. 1, 2001   |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|76) Trinity Commons                                                   |  | 27,868,055      |  | 2,429,700     |  | 19,658,481                     |      | 678,164             |               | 4,063,148 |  | 34,420,902 |  | 38,484,050    |  | 2,560,033     |  | 2000     |  | Oct. 1, 2001   |  | 27.5 yrs.
|Trinity Commons Phase II * Raleigh, NC * Multi-family housing         |  |                 |  | 1,728,948     |  | 13,988,757                     |      |                     |               |           |  |            |  |               |  |               |  | 2002     |  | July 30, 2002  |  |          
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|77) St. Andrews                                                       |  | 18,253,060      |  | 682,725       |  | 16,385,411                     |      | 658,677             |               | 1,054,379 |  | 26,973,587 |  | 28,027,966    |  | 2,290,933     |  | 1998     |  | Oct. 1, 2001   |  | 27.5 yrs.
|St. Andrews Phase II * Wilmington, NC * Multi-family housing          |  |                 |  | 407,486       |  | 9,893,667                      |      |                     |               |           |  |            |  |               |  |               |  | 2002     |  | March 20, 2002 |  |          
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|78) Waterford * Richmond, VA * Multi-family housing                   |  | 16,565,166      |  | 2,700,000     |  | 19,800,000                     |      | 1,340,663           |               | 2,732,352 |  | 21,108,311 |  | 23,840,663    |  | 1,720,447     |  | 1989     |  | Dec. 10, 2001  |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|79) The Enclave at South Tryon * Charlotte, NC * Multi-family housing |  |                |  | 805,000       |  | 15,295,000                     |      | 223,220             |               | 785,878   |  | 15,537,342 |  | 16,323,220    |  | 641,753       |  | 2002     |  | Dec. 2, 2002   |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|80) Windsor Heights * Irving, TX * Multi-family housing               |  | 25,000,000      |  | 3,480,000     |  | 25,520,000                     |      | 579,865             |               | 3,429,143 |  | 26,150,722 |  | 29,579,865    |  | 1,101,468     |  | 1997     |  | Dec. 23, 2002  |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|81) Greentree * Savannah,GA * Multi-family housing                    |  | 7,720,604       |  | 774,735       |  | 10,169,968                     |      | 159,943             |               | 774,735   |  | 10,329,911 |  | 11,104,646    |  | 260,341       |  | 1984     |  | May 28, 2003   |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|82) Hammocks * Savannah,GA * Multi-family housing                     |  | 22,813,593      |  | 1,226,271     |  | 24,116,835                     |      | 125,874             |               | 1,226,271 |  | 24,242,709 |  | 25,468,980    |  | 601,365       |  | 1997     |  | May 28, 2003   |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|83) Huntington * Savannah,GA * Multi-family housing                   |  | 5,727,614       |  | 709,434       |  | 7,565,618                      |      | 70,630              |               | 709,434   |  | 7,636,248  |  | 8,345,682     |  | 188,696       |  | 1986     |  | May 28, 2003   |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|84) Marsh Cove * Savannah,GA * Multi-family housing                   |  | 9,376,414       |  | 780,862       |  | 11,092,971                     |      | 359,434             |               | 780,862   |  | 11,452,405 |  | 12,233,267    |  | 288,522       |  | 1983     |  | May 28, 2003   |  | 27.5 yrs.
|                                                                      |  |                 |  |               |  |                                |      |                     |               |           | 
|85) Merritt at Whitemarsh * Savannah,GA * Multi-family housing        |  | 15,000,000      |  | 1,756,178     |  | 21,050,141                     |      | 62,594              |               | 1,756,178 |  | 21,112,735 |  | 22,868,913    |  | 520,039       |  | 2002     |  | May 28, 2003   |  | 27.5 yrs.



60



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)(Continued)



|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |   |             |           |   |               |  |               |               |          |   |               |     |  |   |             |  |      |  |              |  |          
|------------------------------------------------------------------- |  | --------------- | ----------- | ------------- | - | ------------------------------ | ---- | -------------------- | ------------- | ----- | - | ----------- | --------- | - | ------------- |  | ------------- | ------------- | -------- | - | ------------- | --- |  | - | ----------- |  | ---- |  | ------------ |  | ---------
|Description                                                         |  | Encumbrances(2) |             | Initial Cost  |   | Subsequently Capitalized Impr. |      | Gross Amount Carried |               | Total |   |             | Acc. Dep. |   | Dateof Const. |  | Date Acquired |               | Dep.Life
|                                                                    |  | Land            |             | Bldg. & Impr. |   |                                | Land |                      | Bldg. & Impr. |       |   |             |           |  
|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |  
|86) Merritt at James Island * Charleston, SC * Multi-family housing |  |                 | 18,575,651  |               |   | 2,139,147                      |      |                      | 22,469,999    |       |   | 59,125      |           |   | 2,139,147     |  |               | 22,529,124    |          |   | 24,668,271    |     |  |   | 553,132     |  | 2002 |  | May 28, 2003 |  | 27.5 yrs.
|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |  
|87) Quarterdeck * Charleston, SC * Multi-family housing             |  |                 | 11,449,336  |               |   | 986,085                        |      |                      | 14,807,766    |       |   | 94,352      |           |   | 986,085       |  |               | 14,902,118    |          |   | 15,888,203    |     |  |   | 366,210     |  | 1987 |  | May 28, 2003 |  | 27.5 yrs.
|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |  
|88) Waters Edge *Summerville, SC * Multi-family housing             |  |                 | 8,271,007   |               |   | 1,072,584                      |      |                      | 9,267,817     |       |   | 94,165      |           |   | 1,072,584     |  |               | 9,361,982     |          |   | 10,434,566    |     |  |   | 230,377     |  | 1985 |  | May 28, 2003 |  | 27.5 yrs.
|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |  
|89) Windsor Place * Goose Creek, SC * Multi-family housing          |  |                 | 10,491,799  |               |   | 1,577,276                      |      |                      | 12,440,421    |       |   | 72,104      |           |   | 1,577,276     |  |               | 12,512,525    |          |   | 14,089,801    |     |  |   | 306,309     |  | 1985 |  | May 28, 2003 |  | 27.5 yrs.
|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |  
|Real Estate Under Development                                       |  |                 |            |               |   | 5,449,674                      |      |                      |              |       |   |            |           |   | 5,449,674     |  |               |              |          |   | 5,449,674     |     |  |   |             |  |      |  |              |  |          
|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |  
|                                                                    |  | $               | 801,753,725 |               | $ | 165,525,400                    |      | $                    | 984,384,700   |       | $ | 157,510,274 |           | $ | 165,641,995   |  | $             | 1,141,778,379 |          | $ | 1,307,420,374 | (1) |  | $ | 224,534,930 |  |      |  |              |  |          

---

|(1) |  | The aggregate cost for Federal Income tax purposes was approximately $1.3 billion at December 31, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------



|(2) |  | The total includes $87.1 million of debt secured by 17 apartment communities which is not allocated among the individual apartment communities.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|
|



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                             
|            | 
|2.1         |  | Agreement and Plan of Merger among Cornerstone Realty Income Trust, Inc., Cornerstone Merger Sub, Inc. and Merry Land Properties, Inc.
dated February 19, 2003 (Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed October 7, 2002; SEC File No. 1-12875).                                                                                    
|            | 
|2.2         |  | Purchase and Sale Agreement dated February 19, 2003 by and among Merry Land Properties, Inc. and Merry Land & Investment Company, LLC
(Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K filed October 7, 2002; SEC File No. 1-12875).                                                                                                             
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation of Cornerstone Realty Income Trust, Inc., as amended (Incorporated by reference to Exhibit
3.1 to Current Report on Form 8-K dated May 12, 1998; SEC File No. 1-12875).                                                                                                                                                  
|            | 
|3.2         |  | Articles of Amendment to the Amended and Restated Articles of Incorporation of Cornerstone Realty Income Trust, Inc. (Incorporated by
reference to Exhibit 3.2 to Current Report on Form 8-K dated July 23, 1999; SEC File No. 1-12875).                                                                                                                                
|            | 
|3.3         |  | Bylaws of Cornerstone Realty Income Trust, Inc. (Amended Through February 13, 2003). (Incorporated by reference to Exhibit 3.3 to Annual
Report on Form 10-K filed March 28, 2003; SEC File No. 1-12875)                                                                                                                                                                
|            | 
|4.1         |  | Promissory Note dated September 27, 1999 in the principal amount of $50,550,000 made payable by Cornerstone Realty Income Trust, Inc. to
the order of The Prudential Insurance Company of America (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                              
|            | 
|4.2         |  | Promissory Note dated September 27, 1999 in the principal amount of $22,950,000 made payable by CRIT-NC, LLC to the order of The Prudential
Insurance Company of America (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                       
|            | 
|4.3         |  | Mortgage and Security Agreement dated as of September 27, 1999 from Cornerstone Realty Income Trust, Inc., as borrower, to The Prudential
Insurance Company of America, as lender, pertaining to the Hampton Pointe and Westchase properties (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).   
|            | 
|4.4         |  | Mortgage and Security Agreement dated as of September 27, 1999 from Cornerstone Realty Income Trust, Inc., as borrower, to The Prudential
Insurance Company of America, as lender, pertaining to the Arbors at Windsor Lake property (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).           
|            | 
|4.5         |  | Deed of Trust and Security Agreement dated as of September 27, 1999 made by CRIT-NC, LLC, as borrower, for the benefit of The Prudential
Insurance Company of America, as lender, pertaining to the Charleston Place and Stone Point properties (Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).
|            | 
|4.6         |  | Deed of Trust and Security Agreement dated as of September 27, 1999 made by CRIT-NC, LLC, as borrower, for the benefit of The Prudential
Insurance Company of America, as lender, pertaining to the St. Regis and Remington Place properties (Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).   
|            | 
|4.7         |  | Deed To Secure Debt and Security Agreement by Cornerstone Realty Income Trust, Inc., as borrower, to The Prudential Insurance Company of
America, as lender, pertaining to the Ashley Run, Stone Brook and Spring Lake properties (Incorporated by reference to Exhibit 4.7 to Current Report on Form 8-K dated September 29, 1999; SEC File 1-12875).                  



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 
|4.8         |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Charleston County, South Carolina) (Incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                       
|            | 
|4.9         |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Richland County, South Carolina) (Incorporated by reference to Exhibit 4.9 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                         
|            | 
|4.10        |  | Assignment of Leases and Rents dated as of September 27, 1999, by CRIT-NC, LLC to The Prudential Insurance Company of America (Mecklenburg
County, North Carolina) (Incorporated by reference to Exhibit 4.10 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                                              
|            | 
|4.11        |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Clayton County, Georgia) (Incorporated by reference to Exhibit 4.11 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                                
|            | 
|4.12        |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Gwinnett County, Georgia) (Incorporated by reference to Exhibit 4.12 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                               
|            | 
|4.13        |  | Assignment of Leases and Rents dated as of September 27, 1999, by CRIT-NC, LLC to The Prudential Insurance Company of America (Wake County,
North Carolina) (Incorporated by reference to Exhibit 4.13 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                                                     
|            | 
|4.14        |  | Promissory Note dated December 12, 2000 in the principal amount of $10,500,000 made payable by CRIT-VA, Inc. to First Union National Bank,
with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.14 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                                                
|            | 
|4.15        |  | Indemnity and Guaranty Agreement dated as of December 12, 2000 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First
Union National Bank as Lender, in connection with a $10,500,000 loan to CRIT-VA, Inc. as Borrower, with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.15 to Current Report on Form 8-K dated
December 12, 2000; SEC File No. 1-12875).
|            | 
|4.16        |  | Deed of Trust and Security Agreement dated as of December 12, 2000, from CRIT-VA, Inc., as Grantor, to TRSTE, Inc. as Trustee for First
Union National Bank, the Beneficiary with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.16 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                              
|            | 
|4.17        |  | Assignment of Warranties and Other Contract Rights dated as of December 12, 2000 from CRIT-VA, Inc. as Borrower to First Union National
Bank as Lender with respect to the Mayflower Apartments in Virginia Beach, Virginia. Incorporated by reference to Exhibit 10.17 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                                     
|            | 
|4.18        |  | Assignment of Leases and Rents dated as of December 12, 2000 by CRIT-VA, Inc. as Assignor in favor of First Union National Bank as Assignee
with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.18 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                                               



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                  
|            | 
|4.19        |  | Consent and Agreement of Manager dated as of December 12, 2000 by CRIT-VA, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.19 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                  
|            | 
|4.20        |  | Environmental Indemnity Agreement dated as of December 12, 2000 by CRIT-VA, Inc. and Cornerstone Realty Income Trust, Inc., as Indemnitors,
in favor of First Union National Bank, as Lender, with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.20 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).
|            | 
|4.21        |  | Receipt and Closing Certificate dated December 12, 2000 by CRIT-VA, Inc. as Borrower and Cornerstone Realty Income Trust, Inc. as Guarantor
in favor of First Union National Bank, as Lender, with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.21 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).
|            | 
|4.22        |  | Schedule setting forth information on 14 substantially identical promissory notes (with respect to Exhibit 4.14) dated December 12, 2000 in
various principal amounts made payable to the order of First Union National Bank. (Incorporated by reference to Exhibit 10.24 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                      
|            | 
|4.23        |  | Schedule setting forth information on 14 substantially identical Indemnity and Guaranty Agreements (with respect to Exhibit 4.15) dated as
of December 12 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union National Bank as Lender. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).   
|            | 
|4.24        |  | Schedule setting forth information on 14 substantially identical Deeds of Trust (with respect to Exhibit 4.16) dated as of December 12,
2000 with First Union National Bank as Beneficiary. (Incorporated by reference to Exhibit 10.26 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                        
|            | 
|4.25        |  | Schedule setting forth information on 14 substantially identical Assignments of Warranties and Other Contract Rights (with respect to
Exhibit 4.17) dated as of December 12, 2000 to First Union National Bank as Lender. (Incorporated by reference to Exhibit 10.27 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                          
|            | 
|4.26        |  | Schedule setting forth information on 14 substantially identical Assignments of Leases and Rents (with respect to Exhibit 4.18) dated as of
December 12, 2000 to First Union National Bank as Assignee. (Incorporated by reference to Exhibit 10.28 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                            
|            | 
|4.27        |  | Schedule setting forth information on 14 substantially identical Consents and Agreements of Manager (with respect to Exhibit 4.19) dated as
of December 12, 2000 in favor of First Union National Bank. (Incorporated by reference to Exhibit 10.29 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                            
|            | 
|4.28        |  | Schedule setting forth information on 14 substantially identical Environmental Indemnity Agreements (with respect to Exhibit 4.20) dated as
of December 12, 2000 in favor of First Union National Bank. (Incorporated by reference to Exhibit 10.30 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                            
|            | 
|4.29        |  | Schedule setting forth information on 14 substantially identical Receipt and Closing Certificates (with respect to Exhibit 4.21) dated
December 12, 2000 in favor of First Union National Bank. (Incorporated by reference to Exhibit 10.31 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                    



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|4.30        |  | Promissory Note dated March 23, 2001 in the principal amount of $12,750,000 made payable by CRIT-VA II, Inc. to First Union National Bank,
with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                
|            | 
|4.31        |  | Indemnity and Guaranty Agreement dated as of March 23, 2001 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union
National Bank as Lender, in connection with a $12,750,000 loan to CRIT-VA II, Inc. as Borrower, with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K/A filed
April 13, 2001; SEC File No. 1-12875).
|            | 
|4.32        |  | Deed of Trust and Security Agreement dated as of March 23, 2001, from CRIT-VA II, Inc., as Grantor, to TRSTE, Inc. as Trustee for First
Union National Bank, the Beneficiary with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                              
|            | 
|4.33        |  | Assignment of Warranties and Other Contract Rights dated as of March 23, 2001 from CRIT-VA II, Inc. as Borrower to First Union National
Bank as Lender with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                    
|            | 
|4.34        |  | Assignment of Leases and Rents dated as of March 23, 2001 by CRIT-VA II, Inc. as Assignor in favor of First Union National Bank as Assignee
with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                               
|            | 
|4.35        |  | Consent and Agreement of Manager dated as of March 23, 2001 by CRIT-VA II, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                               
|            | 
|4.36        |  | Environmental Indemnity Agreement dated as of March 23, 2001 by CRIT-VA II, Inc. and Cornerstone Realty Income Trust, Inc., as Indemnitors,
in favor of First Union National Bank, as Lender, with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.7 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                             
|            | 
|4.37        |  | Receipt and Closing Certificate dated March 23, 2001 by CRIT-VA II, Inc. as Borrower and Cornerstone Realty Income Trust, Inc. as Guarantor
in favor of First Union National Bank, as Lender, with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                             
|            | 
|4.38        |  | Schedule setting forth information on six substantially identical promissory notes dated March 23, 2001 in various principal amounts made
payable to the order of First Union National Bank. (Incorporated by reference to Exhibit 4.9 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                     
|            | 
|4.39        |  | Schedule setting forth information on six substantially identical Indemnity and Guaranty Agreements dated as of March 23, 2001 by
Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.10 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                          
|            | 
|4.40        |  | Schedule setting forth information on six substantially identical Deeds of Trust dated as of March 23, 2001 with First Union National Bank
as Beneficiary. (Incorporated by reference to Exhibit 4.11 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                                                      



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|4.41        |  | Schedule setting forth information on six substantially identical Assignments of Warranties and Other Contract Rights dated as of March 23,
2001 to First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.12 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                      
|            | 
|4.42        |  | Schedule setting forth information on six substantially identical Assignments of Leases and Rents dated as of March 23, 2001 to First Union
National Bank as Assignee. (Incorporated by reference to Exhibit 4.13 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                                        
|            | 
|4.43        |  | Schedule setting forth information on six substantially identical Consents and Agreements of Manager dated as of March 23, 2001 in favor of
First Union National Bank. (Incorporated by reference to Exhibit 4.14 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                                        
|            | 
|4.44        |  | Schedule setting forth information on six substantially identical Environmental Indemnity Agreements dated as of March 23, 2001 in favor of
First Union National Bank. (Incorporated by reference to Exhibit 4.15 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                                        
|            | 
|4.45        |  | Schedule setting forth information on six substantially identical Receipt and Closing Certificates dated March 23, 2001 in favor of First
Union National Bank. (Incorporated by reference to Exhibit 4.16 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                                                
|            | 
|4.46        |  | Multifamily Note dated April 4, 2001 in the principal amount of $15,680,000 made payable to ARCS Commercial Mortgage Co., L.P. by CAC III
Limited Partnership, with respect to Silverbrook I Apartments in Grand Prairie, Texas. (Incorporated by reference to Exhibit (b)(19) to Schedule TO/A (amendment no. 1) filed April 11, 2001; SEC File No. 1-12875).                                                                        
|            | 
|4.47        |  | Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of April 4, 2001 from CAC III Limited
Partnership, as Grantor to trustee for ARCS Commercial Mortgage Co., L.P. with respect to the Silverbrook I Apartments in Grand Prairie, Texas. (Incorporated by reference to Exhibit (b)(20) to Schedule TO/A (amendment no. 1) filed April 11, 2001;
SEC File No. 1-12875).                    
|            | 
|4.48        |  | Replacement Reserve and Security Agreement dated as of April 4, 2001 by and between CAC III Limited Partnership and ARCS Commercial
Mortgage Co., L.P. with respect to Silverbrook I Apartments in Grant Prairie, Texas. (Incorporated by reference to Exhibit (b)(21) to Schedule TO/A (amendment no. 1) filed April 11, 2001; SEC File No. 1-12875).                                                                                
|            | 
|4.49        |  | Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of April 4, 2001 from ARCS
Commercial Mortgage Co., L.P. to Fannie Mae with respect to the Silverbrook I Apartments in Grand Prairie, Texas. (Incorporated by reference to Exhibit (b)(22) to Schedule TO/A (amendment no. 1) filed April 11, 2001).                                                                     
|            | 
|4.50        |  | Promissory Note dated June 20, 2001 in the principal amount of $11,100,000 made payable by CRIT-VA III, Inc. to First Union National Bank,
with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                               
|            | 
|4.51        |  | Indemnity and Guaranty Agreement dated as of June 20, 2001 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union
National Bank as Lender, in connection with a $11,100,000 loan to CRIT-VA III, Inc. as Borrower with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K/A filed
August 30, 2001; SEC File No. 1-12875).



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|4.52        |  | Deed of Trust and Security Agreement dated as of June 20, 2001, from CRIT-VA III, Inc., as Grantor, to TRSTE, Inc. as Trustee for First
Union National Bank, the Beneficiary, with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).              
|            | 
|4.53        |  | Assignment of Warranties and Other Contract Rights dated as of June 20, 2001 from CRIT-VA III, Inc. as Borrower to First Union National
Bank as Lender with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                     
|            | 
|4.54        |  | Assignment of Leases and Rents dated as of June 20, 2001 by CRIT-VA III, Inc. as Assignor in favor of First Union National Bank as Assignee
with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                
|            | 
|4.55        |  | Consent and Agreement of Manager dated as of June 20, 2001 by CRIT-VA III, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                
|            | 
|4.56        |  | Environmental Indemnity Agreement dated as of June 20, 2001 by CRIT-VA III, Inc. and Cornerstone Realty Income Trust, Inc., as Indemnitors,
in favor of First Union National Bank as Lender with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.7 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).
|            | 
|4.57        |  | Receipt and Closing Certificate dated June 20, 2001 by CRIT-VA III, Inc. as Borrower and Cornerstone Realty Income Trust, Inc. as Guarantor
in favor of First Union National Bank as Lender with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).
|            | 
|4.58        |  | Schedule setting forth information on seven substantially identical promissory notes dated June 20, 2001 in various principal amounts made
payable to the order of First Union National Bank. (Incorporated by reference to Exhibit 4.9 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                   
|            | 
|4.59        |  | Schedule setting forth information on seven substantially identical Indemnity and Guaranty Agreements dated as of June 20, 2001 by
Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.10 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                        
|            | 
|4.60        |  | Schedule setting forth information on seven substantially identical Deeds of Trust dated as of June 20, 2001 with First Union National Bank
as Beneficiary. (Incorporated by reference to Exhibit 4.11 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                                    
|            | 
|4.61        |  | Schedule setting forth information on seven substantially identical Assignments of Warranties and Other Contract Rights dated as of June
20, 2001 to First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.12 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                      
|            | 
|4.62        |  | Schedule setting forth information on seven substantially identical Assignments of Leases and Rents dated as of June 20, 2001 to First
Union National Bank as Assignee. (Incorporated by reference to Exhibit 4.13 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                        



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                       
|            | 
|4.63        |  | Schedule setting forth information on seven substantially identical Consents and Agreements of Manager dated as of June 20, 2001 in favor
of First Union National Bank. (Incorporated by reference to Exhibit 4.14 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                  
|            | 
|4.64        |  | Schedule setting forth information on seven substantially identical Environmental Indemnity Agreements dated as of June 20, 2001 in favor
of First Union National Bank. (Incorporated by reference to Exhibit 4.15 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                  
|            | 
|4.65        |  | Schedule setting forth information on seven substantially identical Receipt and Closing Certificates dated June 20, 2001 in favor of First
Union National Bank. (Incorporated by reference to Exhibit 4.16 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                          
|            | 
|4.66        |  | Multifamily Note dated June 20, 2001, in the principal amount of $8,950,000 made payable to the ARCS Commercial Mortgage Co., L.P. by CAC
IV Limited Partnership with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.17 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                         
|            | 
|4.67        |  | Multifamily Deed of Trust, Assignment of Rents and Security Agreement dated June 20, 2001, from CAC IV Limited Partnership, as Grantor, to
trustee for ARCS Commercial Mortgage Co., L.P. with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.18 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).
|            | 
|4.68        |  | Replacement Reserve and Security Agreement, dated June 20, 2001, by and between CAC IV Limited Partnership and ARCS Commercial Mortgage
Co., L.P. with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.19 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                        
|            | 
|4.69        |  | Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of June 20, 2001 from ARCS
Commercial Mortgage Co., L.P. to Fannie Mae with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.20 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).      
|            | 
|4.70        |  | Form of Articles of Amendment designating Series B Convertible Preferred Shares (Incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K filed October 7, 2002; SEC File No. 1-12875).                                                                                                                                                                             
|            | 
|10.1        |  | Agreement for Appointment of Transfer Agent and Registrar between Cornerstone Realty Income Trust, Inc. and First Union National Bank of
North Carolina (Incorporated by reference to Exhibit 10.19 to the registrants Report on Form 10-K for the Year Ended December 31, 1994; SEC File No. 0-23954).                                                                          
|            | 
|10.2        |  | Employment Agreement dated October 1, 2001 between Cornerstone Realty Income Trust, Inc. and Glade M. Knight. This is a management contract
or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14 (c) of Form 10-K.                                                                                                                          
|            | 
|10.3        |  | Employment Agreement dated October 1, 2001 between Cornerstone Realty Income Trust, Inc. and Debra A. Jones. This is a management contract
or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14 (c) of Form 10-K.                                                                                                                           
|            | 
|10.4        |  | Employment Agreement dated October 1, 2001 between Cornerstone Realty Income Trust, Inc. and Stanley J. Olander, Jr. This is a management
contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14 (c) of Form 10-K.                                                                                                                   



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|10.5        |  | First Amendment to the 1992 Incentive Plan Nonstatutory Stock Option Agreement between Cornerstone Realty Income Trust, Inc. and Martin
Zuckerbrod. This is a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14 (c) of Form 10-K. (Incorporated by reference to Exhibit 10.25 to the registrants Report on Form 10-K for the
Year Ended December 31, 1997; SEC File No. 1-12875).  
|            | 
|10.6        |  | First Amendment to the 1992 Incentive Plan Nonstatutory Stock Option Agreement between Cornerstone Realty Income Trust, Inc. and Harry S.
Taubenfeld. This is a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14 (c) of Form 10-K. (Incorporated by reference to Exhibit 10.26 to the registrants Report on Form 10-K for the
Year Ended December 31, 1997; SEC File No. 1-12875).
|            | 
|10.7        |  | Articles of Incorporation of Cornerstone Acquisition Company, as amended by Articles of Amendment thereto. (Incorporated by reference to
Exhibit 10.42 to Annual Report on Form 10-K for the year ended December 31, 1999; SEC File No. 1-12875).                                                                                                                                                                                                
|            | 
|10.8        |  | Bylaws of Cornerstone Acquisition Company. (Incorporated by reference to Exhibit 10.43 to Annual Report on Form 10-K for the year ended
December 31, 1999; SEC File No. 1-12875).                                                                                                                                                                                                                                                                
|            | 
|10.9        |  | Articles of Incorporation of CRIT-SC, Inc. (Incorporated by reference to Exhibit 10.44 to Annual Report on Form 10-K for the year ended
December 31, 1999; SEC File No. 1-12875).                                                                                                                                                                                                                                                                
|            | 
|10.10       |  | Bylaws of CRIT-SC, Inc. (Incorporated by reference to Exhibit 10.45 to Annual Report on Form 10-K for the year ended December 31, 1999; SEC
File No. 1-12875).                                                                                                                                                                                                                                                                                   
|            | 
|10.11       |  | Articles of Organization of CRIT-SC, LLC. (Incorporated by reference to Exhibit 10.46 to Annual Report on Form 10-K for the year ended
December 31, 1999; SEC File No. 1-12875).                                                                                                                                                                                                                                                                 
|            | 
|10.12       |  | Operating Agreement of CRIT-SC, LLC. (Incorporated by reference to Exhibit 10.47 to Annual Report on Form 10-K for the year ended December
31, 1999; SEC File No. 1-12875).                                                                                                                                                                                                                                                                      
|            | 
|10.13       |  | Certificate of Limited Partnership of CRIT-Cornerstone Limited Partnership. (Incorporated by reference to Exhibit 10.48 to Annual Report on
Form 10-K for the year ended December 31, 1999; SEC File No. 1-12875).                                                                                                                                                                                                                               
|            | 
|10.14       |  | Limited Partnership Agreement of CRIT-Cornerstone Limited Partnership. (Incorporated by reference to Exhibit 10.49 to Annual Report on Form
10-K for the year ended December 31, 1999; SEC File No. 1-12875).                                                                                                                                                                                                                                    
|            | 
|10.15       |  | Stock Option Agreement dated July 23, 1999 between Glade M. Knight and Cornerstone Realty Income Trust, Inc. This is a management contract
or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (Incorporated by reference to Exhibit 10.50 to Annual Report on Form 10-K for the year ended December 31, 1999; SEC File No.
1-12875).                                                    
|            | 
|10.16       |  | Change in Control Agreement dated as of August 1, 2000 by and between Cornerstone Realty Income Trust, Inc. and Glade M. Knight. This is a
management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (Incorporated by reference to Exhibit 10.48 to Annual Report on Form 10-K for the year ended December 31, 2000; SEC File
No. 1-12875)).                               
|            | 
|10.17       |  | Change in Control Agreement dated as of August 1, 2000 by and between Cornerstone Realty Income Trust, Inc. and S. J. Olander, Jr. This is
a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (Incorporated by reference to Exhibit 10.49 to Annual Report on Form 10-K for the year ended December 31, 2000; SEC
File No. 1-12875).                              



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 
|10.18       |  | Change in Control Agreement dated as of August 1, 2000 by and between Cornerstone Realty Income Trust, Inc. and Debra A. Jones. This is a
management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (Incorporated by reference to Exhibit 10.50 to Annual Report on Form 10-K for the year ended December 31, 2000; SEC File
No. 1-12875) ).
|            | 
|10.19       |  | CRIT-VA, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 12, 2000;
SEC File No. 1-12875).                                                                                                                                                                                                                                                 
|            | 
|10.20       |  | CRIT-VA, Inc. Bylaws. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).                                                                                                                                                                                                                                                                    
|            | 
|10.21       |  | Property Management Agreement dated as of December 12, 2000 between CRIT-VA, Inc. as Owner and Cornerstone Realty Income Trust, Inc. as
Manager. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                                                                                         
|            | 
|10.22       |  | CRIT Special, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K dated December 12,
2000; SEC File No. 1-12875).                                                                                                                                                                                                                                            
|            | 
|10.23       |  | CRIT Special, Inc. Bylaws. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).                                                                                                                                                                                                                                                               
|            | 
|10.24       |  | CRIT-VA II, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed April 13,
2001; SEC File No. 1-12875).                                                                                                                                                                                                                                               
|            | 
|10.25       |  | CRIT-VA II, Inc. Bylaws. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                                                                                                                                                                                                                                                  
|            | 
|10.26       |  | Property Management Agreement dated as of March 23, 2001 between CRIT-VA II, Inc. as Owner and Cornerstone Realty Income Trust, Inc. as
Manager. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                                          
|            | 
|10.27       |  | CRIT Special II, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K/A filed April 13,
2001; SEC File No. 1-12875).                                                                                                                                                                                                                                          
|            | 
|10.28       |  | CRIT Special II, Inc. Bylaws. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                                                                                                                                                                                                                                             
|            | 
|10.29       |  | CRIT-VA III, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed August 30,
2001; SEC File No. 1-12875).                                                                                                                                                                                                                                             
|            | 
|10.30       |  | CRIT-VA III, Inc. Bylaws. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).                                                                                                                                                                                                                                                                
|            | 
|10.31       |  | Property Management Agreement dated as of June 20, 2001 between CRIT-VA III, Inc. as Owner and Cornerstone Realty Income Trust, Inc. as
Manager. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                                                                         
|            | 
|10.32       |  | CRIT Special III, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K/A filed August
30, 2001; SEC File No. 1-12875).                                                                                                                                                                                                                                        
|            | 
|10.33       |  | CRIT Special III, Inc. Bylaws. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K/A filed August 30, 2001; SEC File
No. 1-12875).                                                                                                                                                                                                                                                           
|            | 
|10.34       |  | Real Estate Purchase and Sale Agreement dated as of June 8, 2001 between Principal Life Insurance Company f/k/a Principal Mutual Life
Insurance Company and Cornerstone Realty Income Trust, Inc. (Incorporated by reference to Exhibit 10.20 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                       
|            | 
|10.35       |  | Operating Partnership dated October 1, 2001. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed December 14,
2001; SEC File No. 1-12875).                                                                                                                                                                                                                                           



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|            |  |                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                   
|            | 
|10.36       |  | Membership Interest Contribution Agreement with State Street, LLC and Schedules for Trinity Commons Apartments, LLC, St. Andrews Place
Apartments, LLC and Timber Crest Apartments, LLC. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                                           
|            | 
|10.37       |  | Membership Interest Contribution Agreement with State Street, LLC and Schedules for St. Andrews Place II, LLC. (Incorporated by reference
to Exhibit 10.3 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                                                                                                                     
|            | 
|10.38       |  | Membership Interest Contribution Agreement with State Street, LLC and Schedules for Trinity Commons II Apartments, LLC. (Incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                                                                                                            
|            | 
|10.39       |  | Membership Interest Contribution Agreement with State Street I, LLC and Schedules for Autumn Park Apartments, LLC and Legacy Park
Apartments, LLC. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                                                                                 
|            | 
|10.40       |  | 1992 Non-Employee Directors Stock Option Plan Amended and Restated Effective July 1, 2002. This is a management contract or compensatory
plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended June 30, 2002; SEC File No. 1-12875).
|            | 
|10.41       |  | 1992 Incentive Plan Amended and Restated Effective July 1, 2002. This is a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the period ended June 30, 2002; SEC File No. 1-12875).                          
|            | 
|21          |  | Subsidiaries of Cornerstone Realty Income Trust, Inc. (FILED HEREWITH).                                                                                                                                                                                                                                                                                                       
|            | 
|23          |  | Consent of Ernst & Young LLP. (FILED HEREWITH).                                                                                                                                                                                                                                                                                                                               
|            | 
|31.1        |  | Certification of the registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED
HEREWITH).                                                                                                                                                                                                                                         
|            | 
|31.2        |  | Certification of the registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED
HEREWITH).                                                                                                                                                                                                                                         
|            | 
|32.1        |  | Certification of the registrants Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (FURNISHED HEREWITH).                                                                                                                                                                                       
|            | 
|32.2        |  | Certification of the registrants Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002 (FURNISHED HEREWITH).                                                                                                                                                                                    





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